2012

ANNUAL REPORT

THIS IS Vacon Plc's 2012 Annual Report. Vacon designs and manufactures products which can comprehensively increase efficient use of energy, considerably improve process control in the industry and utilize renewable sources of energy.

VACON®
DRIVEN BY DRIVES

50 TWh

In 2012, Vacon's AC drives helped save approximately 50 TWh of energy. This corresponds to the production capacity of approximately nine nuclear reactors. At the same time, Vacon's AC drives helped reduce global carbon dioxide emissions considerably.

20 TWh

In addition to saving electricity, Vacon's AC drives help produce clean energy. In the production of wind and solar energy, Vacon's products direct the electricity produced by a wind turbine or solar power plant properly to the grid. In 2012, the amount of renewable energy produced with Vacon's products was approximately 20 TWh. Producing an equivalent amount of energy using coal would generate about 17 million tonnes of carbon dioxide.

CONTENTS
GENERAL SECTION

CORPORATE OVERVIEW

Vacon in brief ... 4
Review by the President and CEO ... 6
Business environment ... 8
Strategy ... 10

BUSINESS OVERVIEW

Products ... 12
Vacon’s customer business sectors ... 15
Building automation ... 16
Marine and offshore ... 18
Elevators and escalators ... 20
Cranes and hoists ... 21
Water and wastewater ... 22
Food and beverage ... 23
Mining and metals ... 24
Pulp and paper ... 25
Solar power ... 26
Wind power ... 27

GOVERNANCE AND MANAGEMENT

Corporate Governance Statement ... 30
Board of Directors ... 36
Executive Management Team ... 37

CORPORATE RESPONSIBILITY

Introduction ... 40
Economic responsibility ... 42
Environmental responsibility ... 43
Social responsibility ... 47
GRI content index ... 54

FINANCIAL STATEMENTS

Board of Directors’ report ... 60

CONSOLIDATED FINANCIAL STATEMENTS

Key figures ... 66
Calculation of key figures ... 67
Consolidated statement of income (IFRS) ... 68
Consolidated statement of financial position (IFRS) ... 69
Consolidated statement of cash flows (IFRS) ... 70
Consolidated statement of changes in equity ... 71
Notes to the consolidated financial statements ... 72

PARENT COMPANY’S FINANCIAL STATEMENTS

Income statement of the parent company (FAS) ... 96
Balance sheet for the parent company (FAS) ... 97
Cash flow statement for the parent company (FAS) ... 98
Notes to the financial statements of the parent company ... 99
Signature for the Board of Directors’ report and financial statements ... 106
Auditor’s report ... 107

INVESTOR INFORMATION

Shares and shareholders ... 109
Investor information ... 112

VACON PLC | ANNUAL REPORT 2012

VACON IN BRIEF

VACON—A FULL-SERVICE AC DRIVE COMPANY

Vacon's operations are driven by a passion to develop, manufacture, and sell the best AC drives and inverters in the world – and to offer customers services spanning the entire product life cycle. Our AC drives make possible optimal process control and energy-efficient electric motors. Vacon's inverters play a key role when energy is produced from renewable sources. In 2012, Vacon's revenues amounted to EUR 388.4 million, and the company employed approximately 1,500 people globally.

An AC drive is a device that is used to control the speed of an electric motor in all industry segments and civil engineering. In addition, inverters based on the same technology are key products in the production of renewable energy. With AC drive technology, it is possible to obtain significant energy savings and produce clean energy from renewable sources, such as the sun and wind.

Vacon was established in Vaasa, Finland, in 1993. It was founded by 13 bold entrepreneurs who shared a passion to develop and manufacture the best AC drives in the world. The year 2012 was the company's 19th year of operations.

CUSTOMERS AND INDUSTRIES

Vacon's production units are located in Finland, China, the USA, Italy and India. In addition to Finland, Vacon has R&D units in Italy, China, and the USA. Vacon has sales offices in 29 countries, and it uses multiple sales channels to sell its products. Vacon's sales channels are original equipment manufacturers (OEMs), system integrators, brand label customers, distributors, and direct sales to end users.

Vacon supplies AC drives to nearly all industry segments and to civil engineering. Typical customer sectors include, among others, machine manufacturing, water treatment, building automation, marine and offshore industry, renewable energy generation, and mining. AC drives are used, for example, in pumps, fans, elevators, escalators, conveyors, compressors, as well as wind and solar power plants.

Vacon's largest customers include Eaton, Honeywell, KONE, Konecranes, Rockwell Automation, Schindler, and The Switch. Vacon is the seventh-largest manufacturer of AC drives in the world and the largest company concentrating solely on AC drives. Vacon estimates that its market share of the global AC drives market is approximately 5%.

SHAREHOLDERS

Vacon Plc's shares are listed on the NASDAQ OMX Helsinki. At the end of 2012, Vacon had 4,665 shareholders, of whom 48.8% were institutions or private investors operating in Finland and 51.2% were nominee-registered and foreign owners. The closing price of Vacon's share on the last day of 2012 was EUR 40.20, and the company's market capitalization was EUR 611.5 million (471.5 million in 2011).

February 2012	March 2012	June 2012	June 2012
Vacon received the Golden Sun Certificate for its 200-kW solar inverters in China	Vacon inaugurated a new factory in India
Vacon launched the renewed VACON® NXP premium product range	Vacon announced its renewed values which are: Stronger together, Trust and respect, Taking ownership and Passion for excellence	Vacon strengthens its position as an industry leader in the AC drives market with the announcement of three new products at the Vacon Drives Conference: VACON® 100, VACON® 100 X and VACON® 20 X

VACON IN BRIEF
GENERAL SECTION

REVENUES

OPERATING PROFIT

RETURN ON EQUITY

EARNINGS PER SHARE

EQUITY RATIO

ORDER BOOK

PERSONNEL AT THE END OF THE PERIOD

GROSS CAPITAL EXPENDITURE

NET CASH FLOW FROM OPERATING ACTIVITIES

August 2012
Vacon opened a Competence Center for solar products in Spain
Vacon established a regional center in Singapore

November 2012
Vacon expanded its operations by opening a new representative office in the Commonwealth of Independent States, CIS, in Almaty, the southern part of Kazakhstan

November 2012
Vacon launched the VACON® 100 FLOW AC drive for pump and fan applications

December 2012
Growth consultancy company Frost & Sullivan presented Vacon with the European AC Drives Product Line Strategy Award

VACON PLC | ANNUAL REPORT 2012

REVIEW BY THE PRESIDENT AND CEO

TOGETHER TOWARDS

EVEN MORE EXCELLENT RESULTS

The year 2012 was a challenging one for Vacon. The beginning of the year was particularly difficult. Orders had started to decline in the last quarter of 2011, and the prerequisites for economic growth seemed weak in Europe, in particular. At the same time, demand for our products designed for the production of renewable energy was still at a low level.

According to preliminary market information, the AC drive market did not grow significantly during 2012. The situation was the most difficult in Europe, where the market did not show signs of growth, or even declined, from the previous year. In Asia and North America, the markets grew slightly.

Despite the difficult start and a challenging market environment, in my opinion, we succeeded well, and therefore I am proud of the performance of Vacon's personnel. The most important issue was that in 2012 we were able to compensate revenues we lost in the production of renewable energy by actively selling our products to other industries.

Our revenues grew and profitability improved in 2012. Revenues totaled EUR 388.4 million (EUR 380.9 million in 2011) and the operating profit percentage was 9.7%.

The share of products for renewable energy in our sales decreased to 3% in 2012, while in 2011 it had been 13%. Instead, the share of building automation in Vacon's sales grew to 25% (19%). Our success was also excellent in the sales of AC drives for the marine and offshore industry, mining, and cranes.

In 2012, we developed the company in accordance with our strategy. We strengthened our product offering by introducing new and magnificent products to the market. New products, such as VACON® 100, VACON® 100 X, VACON® 100 FLOW and VACON® 20 X have been favorably received by the market. Vacon's long-term success is largely based on these new products. Vacon still focuses heavily on the development and, if necessary, expansion of its product portfolio. Since we are the world's largest company focusing solely on AC drives, it is crucial that we have a competitive and extensive product portfolio and the best expertise in the market close to our customers.

We continuously research the development of technology, markets, and customer needs. We use this information to develop our product portfolio. A good example of this is the research into high-power AC drives that we conducted during 2012.

Vacon's goal is to achieve revenues of EUR 500 million, operating profit of 14%, and a return on equity of more than 30% in 2014. In 2012, we took determined steps towards this objective, but we still have a long way to go until we reach our target. In 2013 and 2014, our performance must be excellent and, at the same time, we must have the wisdom to act in a manner that will not weaken growth prerequisites after 2014. We believe that the AC market will grow clearly faster than average industrial production over the long term. At the same time, we also believe that Vacon will grow faster than the AC drive market.

The company's strategy determines the company's objectives and the methods to achieve them. In 2012, we published our new

REVIEW BY THE PRESIDENT AND CEO
GENERAL SECTION

In 2012, we developed the company in accordance with our strategy. We strengthened our product offering by introducing new and magnificent products to the market.

and updated values, which were the end result of discussions conducted with the entire Group personnel.

Values are an integral part of Vacon's future and seamlessly connected with our business objectives. Vacon's values are: Stronger together, Trust and respect, Taking ownership, and Passion for excellence. Vacon's way of operating is based on these values.

Despite all the challenges, 2012 was a good year for Vacon. We are now standing on solid ground, which allows us to pursue together towards even more excellent results, in accordance with our values. I would like to extend my thanks to Vacon's customers, personnel, partners, and shareholders for the year 2012, and wish everyone success in 2013.

Best wishes,
Vesa Laisi

VACON PLC | ANNUAL REPORT 2012

BUSINESS ENVIRONMENT

GROWTH TREND CONTINUES IN THE MARKETS

The long-term growth trend in the AC drive market has continued despite the economic crisis. The financial crises in the European Union and the USA, generated by increased budget deficits, have clearly impacted the growth of industrial production in these regions and, therefore, also the AC drive markets.

The total value of the AC drive market, according to Vacon's estimate, was approximately USD 11.8 billion in 2012. Overall, it can be estimated that growth in the AC drive market is approximately double the growth of GDP. The growth rate varies in different markets. Growth is expected to be fastest in Asia.

The largest market area for AC drives is Asia, which accounts for approximately 35-40% of the world's total markets. The share of Europe in the total markets is approximately 25-30%, and North America accounts for about 30-35%.

DRIVERS OF MARKET GROWTH

Growth in the AC drive market is driven by a number of factors. Urbanization is a global trend which is increasing the need for construction. More than half of the world's population currently lives in cities. Urbanization is a phenomenon in emerging countries, particularly China, India, and Brazil. AC drives are used for optimizing air conditioning and ventilation, as well as in elevators and escalators in new buildings.

The need for clean water is also growing, which increases the volume of wastewater which needs to be treated. Since sources of clean water are limited, water must be reused more and more. Due to the speed con

THE GLOBAL AC DRIVES MARKET

EMEA = Europe, Middle East, Africa
Americas = North and South America
APAC = Asia Pacific

GDP GROWTH FORECASTS BY REGION

EMEA = Europe, Middle East, Africa
Americas = North and South America
APAC = Asia Pacific

BUSINESS ENVIRONMENT
GENERAL SECTION

trol made possible by AC drives, energy can be used as effectively as possible in treating water.

Growth in demand for steel, aluminum, and copper as well as the stone aggregate needed in construction is resulting in growth in mining and quarrying. AC drives have multiple applications, both in new mines and in old ones where operations are being streamlined.

Increased construction and mining are also generating growth in the marine and offshore industries. Since the 2009 economic crisis, the number of new vessel orders is returning to the average level. Increased oil prospecting and production at sea requires additional tender vessels. Exploiting oil fields which are difficult to reach requires speed-controlled motor drives in, among others, drilling and pumping.

Demand for AC drives is also boosted by the effort to prevent climate change and by environmental investments. Increasing energy-efficiency in all processes is key in the prevention of climate change. The European Union has issued a directive regarding the requirements for the ecologically friendly design of energy-using products [2005/32/EC].

The directive describes methods by which energy-efficiency is defined and objectives set for different product groups. This has resulted in the European Commission issuing a regulation [640/2009] regarding the minimum efficiency limits of motors sold in the EU region. The regulation permits motors with slightly lower efficiency, if they have been equipped with AC drives. The requirements will become effective with regard to AC drives on January 1, 2015. In other countries (including the USA, Australia, Japan, and China), similar regulations are pending. The European Committee for Electrotechnical Standardization (CENELEC) is developing an energy-efficiency standard for AC drives. Vacon is participating in the drawing up of the standard.

AC drives are also used in the production of renewable energy, primarily in wind turbines and solar power plants, but also in other methods being developed, such as fuel cell power plants and tidal power plants. The global pursuit to reduce the use of nuclear power and to replace nuclear energy with renewable sources of energy will increase the need for AC drives considerably in the near future. Vacon is actively participating in work concerning the implementation of so-called "smart grids," to discuss issues relating to the management and stability of transmission and distribution networks, among other things.

Vacon believes that the price of energy and, in particular, oil, will continue to be high. It will impact transportation costs and thus decisions to invest in the construction of new plants. Placing production as close as possible to raw material sources and consumers makes sense. Transportation costs also play a role in directing Vacon's production decisions.

The price of energy also impacts the development of vehicles. There is increased need for finding solutions which combine combustion engines and electric drives. The goal is to run a combustion engine at an optimal load and to balance load fluctuations electronically. This is the principle used in, for example, vessels equipped with batteries: they have both a fixed-speed diesel engine and a set of batteries with charging devices, and power always comes from the optimal source. Another example is electrically run work machines, in which the mechanical automatic transmission is replaced by an electric drive. The machines are lighter, require less maintenance, have better efficiency, and use less fuel.

The technical requirement level regarding electrical interference is currently higher in industrialized countries than in emerging countries, although the requirement level there is also clearly being raised. Vacon's AC drives have been designed to work under a variety of conditions and comply with even the strictest EMC directives issued by the EU. This will improve the competitiveness of Vacon's products in emerging countries in the future as well.

No competing or substitute technical solutions exist for AC drives, and none are on the horizon. Therefore, Vacon's view is that the market will inevitably continue to grow in the future as well.

VACON PLC | ANNUAL REPORT 2012

STRATEGY

VACON'S OBJECTIVES AND STRATEGY

Vacon's goal is to achieve revenues of EUR 500 million, operating profit of 14%, and a return on equity of more than 30% in 2014. Vacon works hard to achieve its strategic objectives and to build the prerequisites for strong and profitable growth from 2014 onwards as well.

In 2012, Vacon took important measures to improve profitability. The most important measures included moving component and parts procurement to countries where the cost level is lower, making use of the cost benefit offered by the new generation of products, increasing sales volumes, and managing costs.

Safeguarding growth long into the future requires, among other things, that new growth opportunities are identified and used wisely and at the right time. Since Vacon is a product company, long-term growth is based on our products and product portfolio. Therefore Vacon has invested, and will continue to invest, approximately 6% of its revenue in R&D. By doing this, the company ensures competitive products which meet customers' needs.

The core of Vacon's business strategy has remained unchanged. It is supported by four strategic choices: product leadership, 100% focus on AC drives, a multi-channel sales network, and a global presence.

PRODUCT LEADERSHIP

At the same time, the company has developed its competence so that its technology and product range can be utilized more extensively in different industries and applications. In 2012, Vacon also strongly developed its maintenance service products with its global sales network.

Frost & Sullivan, one of the most esteemed growth company consultants in the world, awarded Vacon with the 2012 European Low Voltage (LV) Alternating Current (AC) Electric Drives Product Line Strategy Award. The award is recognition of Vacon's capability to optimize its strategies, processes, and operations effectively.

100% FOCUS ON AC DRIVES

Vacon is the world's largest company focusing solely on the design and manufacture of AC drives. This focus offers Vacon a clear competitive advantage and allows the company to always provide its customers with the best expertise in the industry in terms of sales, customer service as well as service and maintenance.

MULTI-CHANNEL SALES

Multi-channel sales are at the core of Vacon's sales and marketing strategy. The company sells its products to original equipment manufacturers (OEMs), system integrators, brand label customers, distributors, and end customers. Using several different distribution channels in each geographical area and industry is a genuine competitive advantage, which offers benefits to Vacon. The agility offered by multi-channel sales in its operations helps Vacon succeed in a rapidly changing market environment.

Multi-channel sales requires the continuous development of operations. The sales channels used vary according to the special characteristics of each market area. The channel strategies are different in, for example, China, Germany, Italy, and the United States. Nevertheless, the starting point is always Vacon's growth strategy, which directs multi-channel sales in each country.

In 2012, Vacon's sales by distribution channel compared to 2011 developed as follows: end customers showed a decrease of 13.0%, OEMs showed an increase of 26.9%, distributors showed an increase of 8.3%, brand label customers showed a decrease of 3.0%, and system integrators showed a decrease of 14.4%.

GLOBAL PRESENCE

Vacon has production units in five countries, R&D units in four countries, and sales offices in a total of 29 countries. An extensive presence on different continents provides good prerequisites for customer service, enabling, for example, quick delivery times. An extensive sales network offers sales the necessary local touch. In 2012, Vacon also launched production in Bangalore, India. The purpose of the plant is primarily to serve the market in India and take into consideration its special characteristics.

At the beginning of 2012, Vacon carried out an extensive reorganization with the central objective of bringing its operations close to customers. Through this reorganization, Vacon established, among other things, a new regional sales center in Singapore. In the coming years, the company will also establish new sales companies in order to accelerate sales in selected market areas.

STRATEGY
GENERAL SECTION

STRATEGIC KNOW-HOW

In recent years, Vacon has invested heavily in the development of a common hardware and software platform for AC drives. Vacon's other strategic areas of expertise include product portfolio management, customer relationship management, mass customization, global sourcing as well as information and communication technology tools.

Each area of expertise is continuously developed and monitored in order to ensure that the company has the right and required competence for implementing its strategy. In 2012, competence development focused particularly on management and quality competence. Vacon selects a few competence areas for global development annually. Development is based on the company's long-term strategic needs.

VACON PLC | ANNUAL REPORT 2012

PRODUCTS

ONE OF THE LARGEST PRODUCT PORTFOLIOS IN THE MARKET

In 2012, Vacon introduced several new products. These included, among others, the updated VACON® NXP family of AC drives, and the VACON® 100, VACON® 100 X, VACON® 100 FLOW and VACON® 20 X AC drives, representing the latest, third generation of products.

Vacon's product portfolio is among the largest in the market. Vacon's products can be roughly divided into four categories.

Small AC drives designed for motor control, which are easy and quick to install even if the available space is small. They offer maximum cost-benefits in the market where the number of devices is large. Typical users of these products include original equipment manufacturers (OEMs) and the drives can be installed in various machines, conveyors, compressors, pumps, and fans.

Multipurpose AC drives are extensively used in the industry to control pumps, fans, conveyors, and compressors. Multipurpose AC drives designed for building automation technology needs are used in various commercial buildings.

Industrial AC drives are needed when high power and accurate adjustment of speed and/or torque are required or when electricity must be fed back into the grid. They are used in demanding environments, such as marine and offshore industry, mining, cranes, elevators, escalators, production of renewable energy, or water treatment.

PRODUCTS GENERAL SECTION

Maintenance service products. Vacon is a maintenance service provider whom customers can rely on throughout the entire life cycle of their AC drives. Vacon's maintenance services do not only take care of products but offer appropriate solutions tailored to each customer's individual needs. Vacon's experts have extensive knowledge of the requirements of different business areas and processes, which makes product sizing, implementation, and recycling easier.

Vacon's AC drive design is based on a modular product structure. A modular structure offers flexibility in maintenance and can reduce costs during the device's life cycle. It will be one of the most important areas of development in the future as well. In addition, increased attention will be paid to preventing malfunctions by offering products appropriate for customers' needs and by ensuring that preventive maintenance is as effective as possible.

DID YOU KNOW that Vacon's portfolio contains seven maintenance service products for building a customized service combination:

VACON® ENGINEERING
Vacon's technical design service helps you choose a solution that meets your needs and guarantees and improves energy-efficiency and productivity.
VACON® UPGRADE
Upgrades offer retrofitting and replacement services that ensure your solution is always up to date.
VACON® SPARE PARTS
Spare parts, repair kits, and swap units ensure that the customer's applications are running at all times.
VACON® MAINTENANCE
The primary goal of maintenance is to prevent expensive downtime. Vacon uses high-quality spare parts, and the company's expertise and practical maintenance recommendations ensure uninterrupted operation.
VACON® TRAINING
Vacon trains its customers to become experts in the use of its AC drives and in issues concerning full-scale utilization of AC drives.

VACON PLC | ANNUAL REPORT 2012

BUSINESS OVERVIEW BY CUSTOMER BUSINESS SECTOR

VACON AC DRIVES IMPROVE ADJUSTABILITY AND THE USE OF ENERGY

The impact of AC drives on energy consumption is best seen in the control of pumps and fans. In conveyors and elevators, using AC drives enhances reliability, since they allow for smooth start-up and speed adjustments according to process needs. A conveyor controlled by an AC drive also uses energy more efficiently, since a partially loaded or unnecessarily fast-moving conveyor wastes energy and places unnecessary wear on machinery. Vacon AC drives are very important in marine and offshore applications, in which they improve the efficiency of energy consumption as well as process reliability and controllability.

BUILDING AUTOMATION

BUILDING AUTOMATION
CUSTOMER BUSINESS SECTORS

IMPROVED EFFICIENCY WITH AC DRIVES

The main goal of adjusting indoor air in buildings is effectiveness. High-quality indoor air is important in terms of improving comfort and work efficiency. Energy consumption should also be as effective as possible.

Vacon's products reduce energy consumption considerably in building automation applications for HVAC solutions. Pumps and fans controlled by AC drives operate at the optimal running and flow speed required by the process and rapidly react to any changes in the process. This means energy consumption is always as low as possible. The energy consumption of HVAC systems can be reduced by 20–50%, energy can be utilized more effectively, and total costs can be reduced considerably by means of Vacon's solutions. AC drives also help reduce noise generated by fans, pumps, compressors, and motors.

In practice, Vacon has designed products and solutions for all possible applications in the building automation field, such as for controlling water heaters, pumps, fans, compressors, ventilation units, and condenser fans. Vacon's products also suit special environments, such as ventilation of parking garages and apartment building staircases. The VACON® 100 HVAC AC drive is designed specifically for building automation use to improve the effectiveness of pump, fan, and compressor applications.

THE SHARD IN THE UK

Vacon's AC drives have been installed in prominent buildings in different parts of the world to make them more comfortable, to improve the control of building automation processes, and to accomplish considerable energy savings. For example, the HVAC systems in The Shard in London are controlled using hundreds of VACON 100 HVAC AC drives.

The Shard, 310 meters tall, was completed right before the London Olympics 2012 and it is the tallest building in the EU area. The building houses office space, a luxury hotel, restaurants, residences, and an observation area. Vacon's AC drives were selected for this building because they are efficient, versatile, easy to use, and compliant with the building automation EMC and safety standards. Thanks to their versatile data transfer capabilities, Vacon's AC drives are easy to connect to building automation systems for pump and fan control.

A SEMICONDUCTOR FACTORY IN CHINA

Semiconductor manufacturers' requirements are high as far as the equipment they use is concerned, and the same also applies to AC drives. The equipment operation must be reliable and consistent for uniform quality of the production environment and products.

Semiconductor Manufacturing International Corporation (SMIC), founded in 2000, is one of the world's leading semiconductor manufacturers, with factories in Shanghai, Changdu, and Wuhan in China, among others. Factors affecting the quality of air in the factories, such as temperature, humidity, air pressure, air flow, and cleanliness, are monitored closely. The quality of air is even more important than energy savings, since breakdowns in the HVAC equipment would result in costly production losses.

Vacon supplied the first AC drives to SMIC's factories as early as 2004, and since then the cooperation has gradually expanded. Vacon's AC drives have proven to be durable and effective in demanding conditions. Vacon's maintenance partner Shanghai Okon ensures that SMIC's production continues without interruptions.

> The HVAC systems in The Shard in London are controlled by means of hundreds of AC drives supplied by Vacon.

20%

DID YOU KNOW that in Europe and the United States heating, ventilation, and air conditioning (HVAC systems) alone account for approximately 20% of total consumption of electricity.

A typical pay-off period for AC drives used in building automation and particularly in HVAC applications may be even less than 12 months. Therefore, an AC drive with a service life of more than ten years pays for itself multiple times.

VACON PLC | ANNUAL REPORT 2012

MARINE AND OFFSHORE

MARINE AND OFFSHORE
CUSTOMER BUSINESS SECTORS

ENERGY-EFFICIENCY AND RELIABILITY ACROSS THE SEAS OF THE WORLD

The marine and offshore industry is a wide-ranging industry that includes shipbuilding, marine transport, and port services related to the supply of electricity and the loading of ships. In addition, the offshore industry manufactures machinery for locating and utilizing underwater oil and gas deposits and builds equipment for wind power or wave energy farms located at sea.

Currently, the most significant countries in the marine and offshore industry are South Korea, China, and Brazil. Brazil's share of offshore deliveries has become more prominent in recent years. Known for its rich natural resources, Brazil will need more vessels for its offshore and oil and gas industry needs in the future. Therefore, Brazil is investing more heavily in the offshore industry together with its partner countries. For the same reason, many other big offshore industry countries are planning to transfer their operations to Brazil.

Vacon has operated in the marine and offshore industry since the mid-1990s. Vacon's AC drives used for motor control play an important role in marine and offshore applications, in which they improve the efficiency of energy consumption as well as process reliability and controllability. Vacon's AC drives can also be used to reduce hydrogen oxide, sulfur oxide, and carbon dioxide emissions as well as fuel consumption and noise.

Vacon has operated in the marine and offshore industry since the mid-1990s.

AN INNOVATIVE AND OPEN-MINDED APPROACH TO PROBLEM-SOLVING

Vacon's open-minded attitude of boldly seeking solutions for even the most demanding challenges its customers are facing has offered the company an opportunity to be a pioneer in the offshore industry.

Together with significant system integrators and OEMs, Vacon has developed numerous innovative solutions for vessel and port processes. Vacon's standard AC drives have been certified by the most important certification institutions, and come with optional application-specific special features.

VACON OFFERS A WEALTH OF SOLUTIONS FOR THE MARINE AND OFFSHORE INDUSTRY

The requirements placed on the performance, quality, durability, and reliability of marine and offshore components are high. Vacon's liquid-cooled products are extremely well suited for the control of demanding marine and offshore applications. The liquid-cooled VACON® NXP AC drives are very suitable for applications where high power is needed but where space is limited or air-cooling is difficult to arrange. Liquid-cooling does not require large air ducts in the electrical space, and therefore the equipment is effectively protected even in very demanding conditions. The efficiency of the power and physical size of the liquid-cooled VACON NXP AC drives is among the best in the market. The product is perfect for conditions where vibration, temperature, immunity, and noise level place high demands on processes.

When needed, Vacon's global maintenance network serves customers around the clock, every day of the year.

DID YOU KNOW that Vacon was the first company in the world to develop and apply liquid-cooled AC drives in cargo pump, propeller, pipe-laying, and winch systems. Vacon's product portfolio contains several different liquid-cooled AC drive solutions which meet the requirements of even the most demanding conditions.

Vacon's AC drives control air conditioning and ventilation in many luxury liners, such as the Oasis of the Seas and Allure of the Seas vessels of Royal Caribbean International. In a vessel, the majority of energy is consumed by the air-conditioning fan systems and pumps. Vacon's AC drives make it possible to achieve considerable energy savings.
Vacon and its partners designed and built the world's first electrical trawler management system for the Atlantic Enterprise fishing vessel in 2002. An electrical trawler management system consumes less energy and improves reliability in demanding conditions.

VACON PLC | ANNUAL REPORT 2012

ELEVATORS AND ESCALATORS

A SMOOTH RIDE WITH VACON AC DRIVES

Vacon AC drives are used in elevators and escalators in buildings, mines, and industrial facilities in different parts of the world. The greatest benefit offered by AC drives in elevators and escalators is speed adjustment, which enables smooth acceleration and deceleration, among other things.

Vacon has had long-standing partnerships with some of the major players in the elevator and escalator industry for over ten years. So far, Vacon has supplied more than 100,000 AC drives for elevators and escalators. Vacon's operations are characterized by its ability to identify customers' key requirements: peak performance and a smooth ride.

Vacon provides customized solutions for elevators according to customer needs. The company uses the latest advanced technical features, such as feeding the braking energy back into the electrical grid, standby power or tailored control interfaces.

Vacon offers solutions for the comprehensive control of escalators. Vacon's AC drives provide convenient solutions for escalator stand-by speed adjustment and start/stop logic.

STRONG GROWTH IN CHINA

More than 400,000 new elevators and escalators are installed in China every year; in other words, more than half of all elevators and escalators in the world. Vacon holds a significant position in the growing Chinese market. Nearly one third of new escalators using AC drives and a significant portion of elevators are equipped with Vacon's AC drives. The importance of Vacon's factory in China is underlined since it provides end users and local customers with fast and flexible service. According to forecasts, urbanization in China will continue to be strong in the coming years, which will impact demand for elevators and escalators.

DID YOU KNOW that thanks to innovative technical implementation, Vacon's AC drives help elevator and escalator manufacturers develop solutions which are as energy-efficient as possible.

> A smooth descent of an elevator to a floor and rapid acceleration between floors are controlled by an AC drive.

CRANES AND HOISTS
CUSTOMER BUSINESS SECTORS

PRECISE AND ENERGY-EFFICIENT HOISTING

Almost since its establishment, Vacon has been supplying AC drives for major companies in the crane and hoist industry. AC drives provide cranes and hoists with numerous benefits: increased process control, increased performance, and lower operating costs.

Vacon manufactures AC drives for a very wide power range. Therefore, the AC drives suit a variety of applications, from simple hoists to the most demanding large construction and harbor cranes. Vacon has provided drives for more than 10,000 hoisting applications, totaling more than 1,000 MW of installed power.

Thanks to an extensive product portfolio, vast experience, and the ability to create and modify application software for various needs, Vacon provides solutions for a variety of hoisting applications including main and auxiliary hoists for cranes, bridge and trolley travel, cockpit control, lifts, spreaders, and reels.

LATEST PIPE-LAYING TECHNOLOGY AT SEA IN CHINA

The capacity of Vacon's AC drives for crane applications is utilized in the gigantic pipe-laying barge used in offshore engineering in the China seas. The vessel, containing the latest technology, was built by the Chinese Shanghai Zhenhua Heavy Industry Co., Ltd. (ZPMC), one of the largest manufacturers of heavy machinery in the world. The vessel's 3000-tonne slew crane can simultaneously lay two pipes side by side at the bottom of the sea using its hooks. The crane is capable of hoisting and lowering a load of up to 3,000 tonnes. Vacon's AC drives control the vessel's $360^{\circ}$ crane equipped with hooks.

VACON PLC | ANNUAL REPORT 2012

WATER AND WASTEWATER

SMOOTH WATER TREATMENT WITH VACON AC DRIVES

Water and wastewater treatment plants are an integral part of a functioning modern society. Continuous population growth in the world increases water consumption and the need for clean water, irrigation, and water treatment. Many industries are dependent on water. Agriculture is particularly dependent on water and uses more than 70% of the world's clean water for irrigation. Irrigation water helps produce 40% of the world's food.

Vacon has developed top applications specifically for the treatment of water and wastewater. They can be used for pump control, hose filling, pump supervision, and multiple pump control applications. Vacon also supplies AC drives to irrigation plants and some of the world's largest desalination plants in the Middle East and Australia.

ANNUAL EUR 5,000 SAVINGS AT SWIMMING POOLS IN THE UK

AC drives were installed in the water pumps used in the swimming pools owned by One Leisure, near Cambridge. The drives adjust the running speed of the pumps according to the actual demand. The energy saving potential is considerable in pump applications, particularly since reducing the pump speed by just 25% cuts energy requirements by almost 60%. The solution, implemented by means of VACON® NXL AC drives, provides savings of more than EUR 5,000 in swimming pools' energy costs per year.

DID YOU KNOW that in many water pumping solutions, the pay-off time can be even less than one year.

> Fortum's district cooling system in Stockholm mainly uses cold water from the Baltic Sea, reduces carbon dioxide emissions, and saves as much energy as would be consumed by heating 4,000 single-family homes.

ONE OF THE WORLD'S LARGEST DISTRICT COOLING PLANTS IN STOCKHOLM, SWEDEN

District heating and cooling are examples of the responsible use of energy. 24 meters beneath the lively Stockholm city center is a giant cavern filled with 50,000 cubic meters of water. This district cooling system takes care of cooling office buildings in the city of Stockholm and is one of the largest in the world. Fortum started distributing district cooling in Stockholm as early as 1994 and has been expanding its distribution network ever since. Vacon supplied liquid-cooled VACON® NXP AC drives for the expansion completed in 2010. The drives control pumps filling chilled water tanks and feeding the district cooling network.

FOOD AND BEVERAGE
CUSTOMER BUSINESS SECTORS

HIGH-QUALITY FOOD PRODUCTION WITH VACON AC DRIVES

The food and beverage industry contains a variety of business areas which produce the majority of the food and beverages consumed by the world's population. The food industry is fairly stable in economic fluctuations, and in Europe, for example, it is the largest single industry.

DID YOU KNOW that temperature control is one of the most common requirements in the food and beverage industry. For example, compressor-driven chillers equipped with Vacon's AC drives dissipate the maximum possible amount of heat.

Due to hygiene requirements, production machinery must be cleaned daily with high pressure washdowns. Vacon manufactures AC drives which are in sealed enclosures with IP66 protection and withstand this kind of cleaning.
The sugar industry relies heavily on large centrifugal systems. They take advantage of the VACON Active Front-End units, which reduce the apparent power need and return unused power to the grid.

Space is often limited in the production facilities of the food and beverage industry. Keeping this in mind, Vacon has a range of decentralized AC drives which remove the need for electrical rooms and can fit neatly into tight spaces next to conveyor systems or packaging and bottling lines. Vacon's AC drives reduce the wear on belts, gears, and other devices, and adjust the speed and torque of the motor to enable moving products with different speeds on the conveyors.

MORE REFRIGERATION POWER WITH AC DRIVES

Orogel, the leading producer of frozen vegetables in Italy, uses VACON® 10, VACON® 100 HVAC and VACON® NXL AC drives in its plant in Northern Italy. All the production lines in the plant are fully automated, and their operations are adjusted according to the harvest periods and season. This is possible by means of the programmable logic of Vacon's AC drives. For Orogel, the most complex and energy intensive process is the refrigeration cycle, which has to be guaranteed at all times. Vacon's AC drives provide considerable energy savings in this process as well as other processes utilizing pumps and fans in the plant.

VACON PLC | ANNUAL REPORT 2012

MINING AND METALS

SUSTAINABLE DEVELOPMENT IN HARVESTING NATURAL RESOURCES

Population growth, dependency of people on natural resources, and the economic growth e.g. in India, China, and Brazil have caused the demand for metals and minerals to skyrocket. Vacon offers high-quality AC drive solutions for the demanding conditions and applications of the mining and metal industry. Vacon's products can be used in all stages of the production process in both mines and end product processing. Vacon's products provide accurate and reliable speed and torque control for conveyors, crushers, grinders, and other electrical motor-driven equipment. The VACON® NXP and VACON® NXC AC drives offer the kind of high power production required for heavy material haulage and critical flow control.

A GOLD MINE IN BRAZIL

The Fazenda Brasileiro gold mine, owned by Yamana Gold, Inc., in northeastern Brazil, has been in operation for more than 20 years. Vacon's AC drives were selected for the ventilation and pumping systems of the mine in a large retrofitting project. The speed of ventilation fans is controlled using Vacon's AC drives according to real demand, which saves energy. The pumping system provides the mine with the water needed in the process and pumps out both rainwater and water from excavation. In addition to the energy savings obtained, the selection of the AC drive supplier was also affected by the availability of spare parts and maintenance services locally.

DID YOU KNOW that a bulk of the metal used by industry in China comes from mines in Australia, which are often located at long end challenging distances.

The mining industry is a harsh environment in which tight spaces, dust, and extreme heat place heavy demands on the durability of components and machines. Maintenance is an extremely important aspect of the customer relationship.
Vacon's subsidiary in Australia has invested in building strong local competence and a partner network, and maintains an extensive inventory of spare parts and replacement devices in order to provide the best possible service to its customers.

PULP AND PAPER
CUSTOMER BUSINESS SECTORS

SPEED AND POWER CONTROL IN ALL PROCESS AREAS

The pulp and paper industry processes require reliable, accurate, and efficient control. Vacon's AC drives and sectional drives are used extensively in paper and pulp industry applications and their versatile communication protocols allow for seamless integration into plant automation systems. Single drives, available with power ranges of up to several megawatts, are best suited for controlling pumps, fans, and machinery.

Vacon's common DC bus drive systems are used for sectional drive applications in all kinds of drying, paper, tissue, and board machines. A lot of equipment, such as splitter winders and reeling and packing machines, require state-of-the-art enclosed drive systems.

'95

DID YOU KNOW that nearly all machines in the pulp and paper industry require AC drives for the total optimization of the machine.

Vacon has supplied thousands of AC drives to the pulp and paper industry since 1995. The company has extensive experience in control systems and cooperation with system integrators and DEMs.
Currently, one of the most important market areas for the paper and pulp industry is South America, where Vacon's customers benefit considerably from the company's position as an independent AC drive supplier. Local customer support is provided by Vacon's subsidiary in Brazil and Vacon's distributor and service center network in South America.

QUICK DELIVERY OF REPLACEMENTS

Loss of production caused by unplanned shutdowns in the paper and pulp industry can quickly become costly. For cost reasons, having their own replacement inventory is not feasible for customers. For its Finnish customers, Vacon offers a replacement device service. In case of a malfunction in a customer's device, Vacon can deliver a replacement device typically within two to six hours, depending on the agreement and the customer's geographical location.

Currently, this service covers 20 plants and is available 365 days a year. The service, created from a customer initiative, has been in operation since 2006 and has provided extremely positive experiences. Costs incurred by the replacement service to the companies using it are minimal, compared to costs caused by unplanned shutdowns.

VACON PLC | ANNUAL REPORT 2012

SOLAR POWER

VACON'S STRONG POSITION IN SOLAR ENERGY PRODUCTION

Vacon manufactures solar inverters for applications which utilize energy from the sun. With minor adjustments, solar inverters can utilize the same technology as AC drives.

The primary purpose of solar inverters is to convert the DC power generated by solar panels into AC power suitable for the electrical grid using power inversion technique. The global solar inverter markets have in recent years grown strongly, and similar growth is expected to continue into the future as well. Currently, the development of the market depends on two factors: sufficient solar radiation and energy policies which offer various subsidies and are in favor of solar energy.

The Europe, Middle East and Africa region (EMEA) is still the largest solar energy market, measured by the market price of installations, although the markets in Asia and America have shown the strongest growth in recent years. At the end of the current decade, the production of solar energy is likely to have been distributed between these three areas. Growth is promoted by, among others, the possibility of decentralizing solar power plants and the benefits and savings they offer for power grid operators in densely populated countries as well.

DID YOU KNOW that in 2030, the share of solar energy in energy production in Europe is estimated to be approximately 10%.

> VACON® 8000 SOLAR solar inverters are available for the 10-1,200 kW power range.
> VACON® MULTIMASTER software allows a series of one to twelve separate inverter units to be connected in parallel and ensures that only the necessary number of inverters are switched on at any given moment.
> The VACON® 8000 SOLAR MV station shelters the inverters from environmental factors, so that they can perform to their greatest potential.

COMPETENCE CENTER FOR SOLAR ENERGY PRODUCTS IN SPAIN

In September 2012, Vacon established a competence center for its solar products in Barcelona, Spain. The center offers all the services possibly needed by customers, such as expert services, planning, customer training, demonstrations, and an opportunity to attend project meetings. These services are free for those who purchase a Vacon solar energy product.

SOLAR POWER PLANT ON THE ROOF OF A YARN FACTORY IN SPAIN

Himiesa, one of the leading manufacturers of yarn for the textile industry, had a solar power plant built on the roof of its factory in Alicante. Solar panels manufactured with a thin film solar cell technique were installed at the plant, completed in 2012, with a maximum power of 1,200 kW. Two 600 kW VACON 8000 SOLAR inverters feed the energy generated by the power plant into the electricity distribution grid.

WIND POWER
CUSTOMER BUSINESS SECTORS

CONVERTING WIND INTO ELECTRICITY USING VACON'S TECHNOLOGY

The need to reduce carbon dioxide emissions generated by fossil fuels will make wind an increasingly attractive source of energy. Generating power from wind is, in principle, a simple process: the blades of a wind turbine are attached to a shaft which drives a rotor, the moving component of the generator. This means the kinetic energy created by the rotating blades can be converted into electrical energy, or AC power. After this, Vacon's power converters ensure that the voltage and frequency of the AC power produced meet the stated requirements.

Several factors affect the development of wind power. The key factors are sustainable development, development of cost-effective wind technology, and public support measures for wind energy, which vary according to country.

Vacon offers over ten years worth of experience, extensive knowledge, and the necessary technology to convert energy from renewable sources into electricity, which is forwarded to the power distribution grid.

Vacon provides mass-produced regenerative inverters that can be used by system integrators and wind turbine manufacturers in various wind turbine applications.

Extensive utilization of wind power in energy production is a relatively new phenomenon. The global market for wind power took a clear upward turn in 2004-2005 but later slowed down in 2009-2010. In 2011, the share of wind power of global energy production is estimated to have been slightly over 2%. The forecast for 2021 is approximately 8%. According to current estimates, the number of new installations will grow by approximately 10% per year for the next five years. Asia and Europe are estimated to be the largest markets in the future, and it is expected that wind power utilization will increase in North America as well.

DID YOU KNOW that VACON® 8000 WIND is a power converter which is designed for use in doubly-fed induction generators. Vacon's power converters are available up to 5 megawatts.

The VACON® NXP inverter modules can be used as power converter components.
The VACON® NXP AC drives can be used in wind turbines for yaw, pitch, and auxiliary controls.
Vacon has solid experience in building grid-code compliance functions, identifying disturbances in the grid, and fieldbus interfaces for wind turbine control systems.

VACON PLC | ANNUAL REPORT 2012

GOVERNANCE AND MANAGEMENT

GOOD GOVERNANCE AND MANAGEMENT PROMOTE GROWTH, RENEWAL, AND WELL-BEING

The Vacon Group operates in accordance with the principles of good governance and adheres to the Corporate Governance Code 2010 for Finnish listed companies. The Code is available on the website of the Finnish Securities Market Association at www.cgfinland.fi.

CORPORATE GOVERNANCE STATEMENT

CORPORATE GOVERNANCE STATEMENT 2012

COMPLIANCE WITH THE CORPORATE GOVERNANCE CODE OF FINNISH LISTED COMPANIES

Vacon Plc adheres to the Finnish Corporate Governance Code for listed companies ("Corporate Governance Code"), effective from October 1, 2010, in its entirety. This Corporate Governance Statement has been compiled in accordance with Section 7, Chapter 7 of the Securities Market Act (746/2012) and Recommendation 54 of the Corporate Governance Code. The company's Audit Committee has approved the Statement. The company's auditor PricewaterhouseCoopers Oy has verified that the Statement has been issued and that the description contained in it concerning the main principles of the internal audit and risk management systems related to the financial reporting process is consistent with the financial statements. The Corporate Governance Code in full is available on the Securities Market Association website at www.cgfinland.fi. The company's Corporate Governance Statement is available on the company's website at www.vacon.com > Investors > Corporate governance. Vacon Plc's shares are listed on the NASDAQ OMX Helsinki.

The Board of Directors' report for 2012 is included in the Annual Report, available on the company's website at www.vacon.com > Investors > Publications and releases > Annual reports.

INTERNAL MONITORING AND RISK MANAGEMENT SYSTEMS RELATED TO FINANCIAL REPORTING

Monitoring systems

Vacon Plc's Board of Directors is responsible for the appropriateness of management and operations of the Vacon Group. Vacon Plc's President and CEO ("CEO") is, with the support of the Group's Executive Management Team, responsible for arranging mechanisms for internal monitoring, risk management, internal audit, accounting, and financial administration. The guidelines cover the entire Vacon Group. The monitoring systems aim to ensure the legality of operations, compliance with rules, and reliability of financial reporting in the company.

Internal monitoring

The Vacon Group's annual strategy process determines the strategy and also the Group's targets, main actions, and budget for the next financial year. Vacon Plc's Board of Directors approves the strategy and the annual business plan. The Group's Executive Management Team meets monthly, and regularly monitors the Group's financial situation and the implementation of the business plan. Furthermore, each function monitors the achievement of its targets in its management team on a monthly basis. Vacon Plc's Board of Directors receives weekly reports on Group-level orders, and the monthly performance is reported and discussed in Board meetings. In the Board meetings, Vacon Plc's CEO presents in his monthly report the key financial figures and the most significant events and trends affecting the Group's business operations and their development.

The Vacon Group's financial performance is monitored monthly through a Group-wide consolidation and reporting system. In addition, the goal is to integrate all of Vacon's subsidiaries into the same ERP system. Currently, 95% of revenues are reported through a common ERP system.

The reporting system covers the income statements, balance sheet figures, and key figures of the Group, parent company, and subsidiaries, and, in addition, production indexes for the production sites. The orders received by the production sites and sales companies as well as invoicing are monitored in the Group on a daily basis. Comparison figures used in all monitoring are the budget, the actual figures from the previous year, and the current year's forecasts.

The Group's financial administration and financial officers of the subsidiaries form a network which monitors the financial management of the Group. The Group's financial reporting process adheres to the guidelines drawn up by the Group in compliance with legislation, the International Financial Reporting Standards (IFRS) and other requirements set for listed companies.

Internal audit

The purpose of Vacon's internal audit is to ensure that the company implements its strategy in accordance with the agreed operational principles and processes and that the internal audit system works. The internal audit focuses specifically on operations in the subsidiaries and works in cooperation with other monitoring functions. Furthermore, the operations of the internal audit have been aligned with the auditing work of the external auditors.

The internal audit assists the Board of Directors and its Audit Committee in their duties relating to the monitoring and management of the company. The Audit Committee approves the annual internal audit plan and receives regular reports on the internal audits completed. At least once a

CORPORATE GOVERNANCE STATEMENT

GOVERNANCE AND MANAGEMENT

year the internal audit presents its report to the Board of Directors. Special audits are also performed as needed. The units to be audited are always selected for one year at a time, taking into account the extent of financial auditing carried out in the units in question, the diversity of the unit's operations, and the experience basis accumulated in the company. Vacon seeks to carry out an internal audit in its major subsidiaries once a year and in others at three-year intervals.

The person who is in charge of the internal audit reports in this capacity to the Group's CFO, and, if needed, she/he has a direct access to the CEO and the Board of Directors. Primarily the Group's own resources are used for the internal audit, although, if needed, an independent third party is used in more demanding audits. The internal audit offers corrective process instructions to units when needed and implements the Group's existing and proven practices and processes in the subsidiaries.

Risk management

Vacon's risk management is governed by the risk management policy approved by the Board of Directors, defining the objectives, principles, roles and responsibilities of risk management. The company's risk management aims to ensure that business objectives are met and the continuity of business operations is secured. Risk management is part of the management of the Group's business operations; it is proactive and aims to take all fundamental risks into account.

Identifying and assessing risks are important parts of the risk management process. Risks are reviewed at two-year intervals at a more detailed level, and, with

regard to the most important risks, created action plans are monitored quarterly.

The underlying principle is that risk management is spread throughout all levels of the organization. Every employee is encouraged to identify, assess and report risks. Employees are expected to report any risks either to their immediate superior or to the Group's CFO, who is in charge of the maintenance and development of risk management methods, risk reporting, and insurance programs. The Vacon Group's Executive Management Team assesses risks regularly, revises risk reporting, if necessary, and reports to the Board of Directors of the parent company on the company's key risks.

Vacon renewed its risk management policy in 2012. Said policy defines the targets aiming at ensuring:

the safety of the personnel of the Vacon Group, its customers and third parties
the competence of the personnel of Vacon
the safety and high quality of Vacon's products and operating methods
compliance with local and international laws, decrees and recommendations
the identification of risks and taking such risks into account in decision-making
the continuity of business operations and sustainable growth, and
the appropriate protection of Vacon's intellectual property rights, brand and reputation.

In 2012, a Business Impact Analysis (BIA) regarding Vacon's production sites in Vaasa and China as well as a thorough Group-level risk survey were completed in collaboration with a third-party expert. In addition, risks related to the supply chain were reduced by, for example, reviewing the

continuity plans of key suppliers. In order to minimize risks related to quality, specific processes were implemented to approve new parts before taking them into use in the production as well as to manage product requirements. The company also continued measures to reduce contractual risks.

The risk management policy is reviewed annually to ensure that it is up to date. It is available for all employees and included in the orientation of new employees. More information about risk management is available to employees, for example, on the Group's intranet. Vacon Plc describes the significant near-term risks and uncertainties associated with the business operations in its interim reports and in the Board of Directors' report.

Insider administration

Vacon Plc follows the insider guidelines for the listed companies of NASDAQ OMX Helsinki and the company's own insider guidelines, which in certain aspects set stricter requirements for handling insider information than those of the NASDAQ OMX Helsinki.

Vacon Plc maintains public and company-specific registers of insiders in the SIRE system of Euroclear Finland Oy. The company's public permanent insiders, based on their position as stated in the Securities Market Act, comprise the Board of Directors, the CEO and his deputy, and the auditor. In addition to these, according to a decision of the parent company's Board of Directors, other public permanent insiders are the other members of the Group's Executive Management Team, the secretary to the parent company's Board of Directors, as well as

the spouses or registered partners of all the above, minors, and other family members who have lived in the same household for at least one year. Vacon Plc's company-specific insiders include personnel in the Group's management, finance and communications departments and the executive assistants of senior management. The company also establishes and maintains project-specific insider registers if required by law or other regulations.

The duration of Vacon Plc's silent period is 21 days. The silent period ends upon the publication of an interim report or financial statements release. During the silent period, Vacon Plc's permanent insiders are not allowed to trade in the company's securities. The company does not comment on the market outlook and does not meet financial market or media representatives during the silent period. Also, Vacon Plc does not purchase its own shares during this period. Project-specific insiders may not trade in the company's securities before the termination of the project in question.

As in 2011, training events were organized also in 2012 for the company's company-specific insiders in order to review the insider regulations and guidelines.

Audit

In accordance with Vacon Plc's Articles of Association, the company has a minimum of one (1) and a maximum of two (2) auditors and at a maximum the same number of deputy auditors. The auditors must be public accountants or accounting firms authorized by the Central Chamber of Commerce of Finland. The auditors re-elected by Vacon Plc's Annual General Meeting on March 27,

VACON PLC | ANNUAL REPORT 2012

CORPORATE GOVERNANCE STATEMENT

2012 are the authorized public accountants PricewaterhouseCoopers Oy (PwC) and the principal auditor appointed by PwC for the financial year was Markku Katajisto, APA. In addition to the duties in accordance with current regulations, the auditor also reports on his observations in the audit to Vacon Plc's Board of Directors.

The combined fees of PwC related to auditing for the entire Group were approximately EUR 134,000 in 2012. Other fees paid to the auditors by the Group were approximately EUR 177,000.

GENERAL MEETING

The highest authority in Vacon Plc is exercised by the company's shareholders in the General Meeting, which is convened by the company's Board of Directors. The Annual General Meeting is held annually on a date determined by the Board of Directors, but no later than at the end of June. Extraordinary General Meetings are convened when necessary. The main matters falling within the jurisdiction of the General Meeting include adopting the financial statements, distribution of dividends, discharging the members of the Board of Directors and the CEO from liability, deciding on the number of Board members and auditors and their election and remuneration, and possible amendments to the Articles of Association.

More information on convening and attending the General Meeting and on decision-making in the meeting is available on the company's website at www.vacon.com > Investors > Corporate Governance > Annual General Meetings. The company is not aware of any shareholder agreements concerning the use of voting rights in the company or of any agreements limiting the disposal of the company's shares with the exception of an undertaking by AC Invest Three B.V., a wholly owned subsidiary of Ahlström Capital Oy, to refrain from selling its shares in Vacon Plc on the market for a period of 270 days following the sale of shares on November 1, 2012.

It is the company's aim that all Board members and the auditor attend the Annual General Meeting. Persons nominated for the first time as candidates for Board members shall attend the General Meeting that elects the Board members, unless they have very pressing grounds for being absent. The CEO of the company attends all General Meetings.

In 2012, Vacon Plc's Annual General Meeting was held on March 27, 2012 in Vaasa. 154 shareholders were represented at the meeting, holding a total of approximately 70% of the voting rights of the company. Six members of the Board of Directors attended the meeting. In addition, the meeting was attended by the CEO, CFO and the company's management and the representatives of the company's auditing firm. Documents from the Annual General Meeting 2012 are available on the company's website at www.vacon.com > Investors > Corporate Governance > Annual General Meetings > AGM 2012.

COMPOSITION AND OPERATIONS OF THE BOARD OF DIRECTORS AND ITS COMMITTEES

Composition and term of office of the Board of Directors

According to the Articles of Association, Vacon Plc's Board of Directors has at least five and at most seven members chosen by the General Meeting. The members of Vacon Plc's Board are elected by the Annual General Meeting for a term of one year at a time. The Articles of Association do not stipulate a maximum age limit for Board members nor do they limit the number of terms of office. The Board of Directors convenes for an organization meeting immediately after the Annual General Meeting and elects a Chairman and Vice Chairman from among its members for one term of office.

Vacon Plc's Annual General Meeting held on March 27, 2012 decided that the number of the members on the Board of Directors remains at seven. Pekka Ahlqvist, Jari Eklund, Jan Inborr, Juha Kytölä, Panu Routila, Mika Vehviläinen, and Riitta Viitala were re-elected as Board members. Jan Inborr was re-elected as Chairman and Mika Vehviläinen was re-elected as Vice Chairman of the Board of Directors at the organization meeting of the Board. The biographical details of the Board members and their shareholdings in the company are set forth at the end of this statement.

Duties of the Board of Directors

The tasks and duties of Vacon Plc's Board of Directors are defined on the basis of the Finnish Companies' Act, the company's Articles of Association, and the Board of Directors' rules of procedure. The Board of Directors is responsible for the company's administration and the arrangement of its operations. The Board is responsible for the proper supervision of accounting and control of financial matters.

The company's Board of Directors has approved written rules of procedure on the duties of the Board, matters to be discussed, as well as meeting practices and decision-making procedures. The Board revises its rules of procedure annually to ensure conformity with good corporate governance at all times. According to the rules of procedure, Vacon Plc's Board of Directors, among other things,

confirms Vacon Plc's and the Vacon Group's long-term objectives and strategy
approves the Group's business plan, budget, and financial plan, and monitors their implementation
decides on major and strategically important single investments and approves the investment programs of the Group companies
monitors the Group's financial performance and the achievement of goals
appoints Vacon Plc's CEO and his deputy as well as the members of the Group's Executive Management Team
decides on the composition of the subsidiaries' Boards of Directors
decides on the principles of remuneration and incentive systems of the personnel
reviews and approves interim reports, the consolidated and the parent company's financial statements and Board of Directors' report, and
confirms the values of the Vacon Group.

Evaluation of independence

At the beginning of 2012, Vacon Plc's Board of Directors evaluated the independence of the Board members in accordance with Recommendation 15 of the Corporate Governance Code.

Based on this evaluation, the Board declared that all members of the Board are independent of the company and that all

CORPORATE GOVERNANCE STATEMENT
GOVERNANCE AND MANAGEMENT

Board members with the exception of Panu Routila are also independent of the major shareholders of the company. Panu Routila is the CEO of Ahlström Capital Oy, whose subsidiary AC Invest Three B.V. is a significant shareholder of Vacon Plc.

Decision-making

Vacon Plc's Board of Directors shall act in the interests of the company and in such a way that its operations will not result in an unjustified advantage for any shareholder or other party at the expense of the company or another shareholder. A Board member is disqualified from being present when the Board considers matters involving the Board member in question and the company. The chairman of the Board of Directors is responsible for convening Board meetings and for meeting practices. When votes are taken, the majority opinion is the Board's decision and, in the case of a tie, the Chairman has a casting vote. In an election of persons, a tie is decided by drawing lots.

Meeting practice and self-assessment

Vacon Plc's Board of Directors generally convenes approximately 10 times per year. In addition to the Board members, the company's CEO and CFO, as a rule, attend Board meetings. Other members of the Executive Management Team attend the meetings upon invitation by the Board. The Board of Directors has not allocated special areas of focus for its members to monitor business operations. Matters are presented at meetings by the CEO or, at his request, by another member of the Group's Executive Management Team. According to the Board of Directors' rules of procedure, the CEO ensures that the Board obtains sufficient information to assess the operations and financial situation of the Group. In addition, the parent company's CEO also supervises the implementation of the Board's decisions and reports to the Board on any deficiencies or problems in implementation.

The Board evaluates its work and procedures annually.

In 2012, the Board held 11 meetings. The average attendance percentage of the Board members was 96%.

Attendance of the members of the Board of Directors in meetings:

Fees (EUR 1000)	2012	2011	2010
Board member
Jan Inborr, Chairman	44	90	30
Mika Vehviläinen, Vice Chairman	23	45	15
Pekka Ahlqvist	21	45	15
Jari Eklund	25	45	15
Juha Kytölä	25	45	11
Panu Routila	25	45	11
Riitta Viitala	23	45	15

Fees and other benefits of the members of the Board of Directors

Vacon Plc's Annual General Meeting decides each year on the fees and principles for reimbursing expenses to the members of the Board of Directors. Fees to the Board members are paid as monetary compensation.

The fees payable to the members of Vacon Plc's Board of Directors in accordance with the 2012 Annual General Meeting were as follows:

monthly fee for the Chairman EUR 2,500
monthly fee for each Board member EUR 1,250
a bonus depending on the Group's revenue and operating profit, which may be a maximum of EUR 2,500 a month for a Board member and a maximum of EUR 5,000 a month for the Chairman
a fee of EUR 500 per meeting for the members of the Board's permanent committees for their attendance in the committee meetings.

The Board members are entitled to per diem allowances and reimbursement of travel expenses in accordance with Vacon Plc's Travel Policy.

The total amount of fees paid to the members of the Board of Directors was approximately EUR 184,500 in 2012. A bonus accumulated on the basis of the 2011 revenues and operating profit was paid to the members of the Board in 2012. The total fees of each member are displayed in the table on the left.

The principles of the remuneration of the Board members are described in more detail in the Remuneration Statement available on the company's website at www.vacon.com > Investors > Corporate Governance > Remuneration Statement.

COMMITTEES

Remuneration and Nomination Committee

Vacon Plc's Board of Directors has established a combined Remuneration and Nomination Committee, comprising three members of the Board. The committee prepares matters and makes recommendations for the General Meeting and the Board to decide on.

The Board of Directors has confirmed the main duties and working procedures of the Remuneration and Nomination Committee in a written charter. The duties of the Remuneration and Nomination Committee include, among other things, assisting the Board in the preparation and handling of matters pertaining to the nomination and remuneration of the Board members and the executives of Vacon. The committee also handles the principles of proposed incentive plans for the personnel as well as pay-outs under said plans prior to their handling at the Board meeting.

VACON PLC | ANNUAL REPORT 2012

CORPORATE GOVERNANCE STATEMENT

On March 27, 2012, the Board elected Jan Inborr as the Chairman of the committee and Mika Vehviläinen and Riitta Viitala as members of the committee. All of them are independent of the company and its significant shareholders. The Remuneration and Nomination Committee had four meetings in 2012 and once the committee made decisions without meeting. The committee members attended the meetings as follows:

Member	Number of meetings attended	Attendance percentage
Jan Inborr, Chairman	4	100
Mika Vehviläinen	4	100
Riitta Viitala
(as from March 27, 2012)	3	100
Jari Eklund
(until March 27, 2012)	1	100

In 2012, the average attendance percentage of the Committee members was thus 100%.

Audit Committee

At its organization meeting on March 27, 2012, the Board established an Audit Committee comprising three Board members.

The Board of Directors has confirmed the main duties and working procedures of the Audit Committee in a written charter. The objective of the committee is to as

sist the Board in its supervisory responsibilities and ensure that the Board is aware of matters which may significantly impact Vacon's financial condition or businesses. Accordingly, the Committee prepares matters relating primarily e.g. to financial reporting, internal control, auditing and compliance with laws and regulations before the handling of such matters by the Board. In addition, the committee makes decisions in certain matters as specified in its charter, for example, approves the annual plan of the internal audit.

On March 27, 2012, the Board elected Panu Routila as the Chairman of the committee and Jari Eklund and Juha Kytölä as members of the committee. All of them are independent of the company and its significant shareholders, with the exception of Panu Routila who is the CEO of Ahlström Capital Oy, the parent company of AC Three Invest B.V. who is a significant shareholder of Vacon Plc. All members have expertise in accounting, bookkeeping or auditing.

The Audit Committee had eight meetings in 2012 and its members attended the committee meetings as follows:

Member	Number of meetings attended	Attendance percentage
Panu Routila, Chairman	8	100
Jari Eklund	8	100
Juha Kytölä	8	100

In 2012, the average attendance percentage of the Committee members was thus 100%.

CEO AND OTHER MANAGEMENT

CEO

Vacon Plc's Board of Directors appoints the parent company's CEO and defines the terms and conditions for his service in writing. The CEO is in charge of the company's administration and day-to-day management. He is accountable to the Board for the achievement of the goals, strategy, plans, policies and objectives set by the Board. The CEO prepares matters to be decided at the meetings of Vacon Plc's Board of Directors and is responsible for executing the Board's decisions. The Group's Executive Management Team is chaired by the CEO.

Since 2002, Vesa Laisi has been the company's CEO. Heikki Hiltunen, a member of the Executive Management Team and responsible for the Market Operations, is the deputy to the CEO. The biographical details of the CEO and his deputy as well as their shareholdings in the company are set forth at the end of this statement.

If Vacon Plc terminates the CEO's service contract, the company will pay the CEO a severance compensation equivalent to 18 months' salary in addition to the salary for the six-month period of notice. The retirement age for the CEO is 60 years. The company has taken out pension insurance for

the CEO, on the basis of which the pension to be paid is 60% of the salary that the pension is based on. The pension ends when the CEO turns 65. The salary that the pension is determined on is based on the average monthly salary calculated from the TyEL employee pension earnings basis from the last four years. In accordance with the service contract of the CEO, the company has taken a life insurance for the CEO.

Executive Management Team

The Board of Directors has appointed the Vacon Group's Executive Management Team which supports the CEO in the preparation of strategic issues, the handling of significant or fundamental operative matters as well as ensuring internal communications.

The Vacon Group's Executive Management Team prepares and guides the development of the Group's processes and business operations and the Group's common functions. The Executive Management Team handles, in particular, the company's strategy, budget, major procurements and projects, the Group structure and organization as well as major policies of administration and the HR policy issues. The Executive Management Team consists of the parent company's CEO and senior management in charge of the functions at the Group level. The Executive Management Team is not an administrative body as stipulated by the Finnish Companies' Act. The subsidiaries

CORPORATE GOVERNANCE STATEMENT
GOVERNANCE AND MANAGEMENT

In 2011 and 2012, the total remuneration of the CEO and the other members of the Executive Management Team was as follows:

2011
| EUR 1000 | Regular cash salary | Performance bonus from previous year | Fringe benefits | Share bonus | Total | Number of shares assigned |
| --- | --- | --- | --- | --- | --- | --- |
| President and CEO | 355 | 149 | 0.5 | 526 | 1,031 | 5,157 |
| Deputy to the CEO | 287 | 112 | 0.5 | 395 | 795 | 3,868 |
| Other members of the Executive Management Team | 889 | 372 | 3 | 1,361 | 2,625 | 13,323 |
| Total | 1,531 | 633 | 4 | 2,282 | 4,450 | 22,348 |

2012
| EUR 1000 | Regular cash salary | Performance bonus from previous year | Fringe benefits | Share bonus | Total | Number of shares assigned |
| --- | --- | --- | --- | --- | --- | --- |
| President and CEO | 352 | 0 | 0.5 | 99 | 452 | 1,188 |
| Deputy to the CEO | 269 | 0 | 0.5 | 74 | 344 | 891 |
| Other members of the Executive Management Team | 534 | 0 | 1.9 | 157 | 693 | 1,881 |
| Total | 1,155 | 0 | 2.9 | 330 | 1,489 | 3,960 |

report to regional sales directors. The regional sales directors and production site directors report directly to the designated members of the Executive Management Team.

At the end of 2012, the Vacon Group's Executive Management Team consisted of:
- Vesa Laisi, President and CEO
- Heikki Hiltunen, Deputy to the CEO,

Executive Vice President, Market Operations
- Tuula Hautamäki, Senior Vice President, Human Resources
- Jukka Kasi, Executive Vice President, Product Operations
- Eriikka Söderström, CFO

The Executive Management Team convened 11 times in 2012. Sebastian Linko, Director, Corporate Communications and Investor Relations, acted as the Secretary to the Executive Management Team. The above listed members of the Executive Management Team have an equivalent pension age, pension insurance as well as life insurance as the CEO. However, in accordance with the decision by the Board of Directors, new members of the Executive

Management Team will not be covered by the pension insurance plan described above.

FEES AND OTHER BENEFITS OF THE CEO AND OTHER MANAGEMENT

The principles of the remuneration of the CEO and other members of the Executive Management Team are described in more detail in the Remuneration Statement available on the company's website at www.vacon.com > Investors > Corporate Governance > Remuneration Statement.

The share bonuses paid in 2012 were based on the fulfillment of the criteria of the 2011 share bonus scheme.

The company's Board of Directors will in spring 2013 decide on the amount of the share bonuses to be paid on the basis of the 2012 share bonus scheme.

Bonus scheme for personnel

Vacon Plc's Board of Directors annually approves the principles of the bonus scheme for all personnel in the parent company and the production companies as well as the bonus scheme applied to the Managing Directors of the subsidiaries.

VACON PLC | ANNUAL REPORT 2012

VACON PLC'S BOARD OF DIRECTORS

Jan Inborr

chairman

born 1948, B.Sc. (Econ.)

Soldino Oy, CEO

Board member since 2002

Previous positions:

Worked in various positions at Ahlström companies from 1972 to 2008.

Board member at:

Enics AG,

BaseN Ltd,

Mervento Oy,

Antti Ahlström Perilliset Oy (chair),

Webforum Europe Ab,

Puryzyme Oy (chair)

No Vacon Plc shares

Pekka Ahlqvist

member

born 1946, M.Sc. (Eng.), MBA

Board member since 2004

Previous positions:

Vice President,

Automation, Wärtsilä Corporation 2006-2007,

Vice President,

Power Plants, Wärtsilä Corporation 2001-2006, and President

of Wärtsilä NSD Finland Oy 1999-2001.

Various management positions at ABB Group in Finland, China, and Thailand 1987-1999,

Management positions in Oy Kymi-Stromberg Ab, Instrumentarium Oy, Oy Stromberg Ab and Teollisuussäätö Oy in 1972-1986.

Board member at:

Pemamek Oy

No Vacon Plc shares

Jari Eklund

member

born 1963, M.Sc. (Econ.)

LocalTapiola, Group Director, Investments

Board member since 2001

Previous positions:

Various positions in the LocalTapiola Group since 1993.

Research Manager at Kansallis-Osake-Pankki 1988-1993,

Assistant at University of Vaasa 1987-1988.

Board member at:

Seligson & Co Oyj,

Ilkka-Yhtymä Oyj (member of the Supervisory Board),

Fingrid Oyj (deputy Board member)

No Vacon Plc shares

Juha Kytölä

member

born 1964, M.Sc. (Eng.)

Wärtsilä Ship Power,

Vice President,

Environmental Solutions business line

Board member since 2010

Previous positions:

Management and expert positions at the Wärtsilä Group since 1989, e.g.

Research and Development Manager for four-stroke engines and development 2003-2005, and management positions in production 2005-2008, and CEO of Wärtsilä Finland Oy 2006-2012.

Board member at:

Oy Merinova Ab

No Vacon Plc shares

Panu Routila

member

born 1964, M.Sc. (Econ.)

CEO, Ahlström Capital Oy

Board member since 2010

Previous positions:

Managing Director of

Alteams Oy, a Kuusakoski Group company, 2002-2007,

Director of Outokumpu Copper's Drawn Products division 1995-2002, and management positions in financial administration abroad for a total of seven years.

Management positions at Partek 1986-1995.

Board member at:

Enics AG (chair),

A&R Packaging AB,

Eibi Elektrik (chair),

AC Cleantech

Management Oy (chair),

Ripasso Energy AB

No Vacon Plc shares

Mika Vehviläinen

Vice Chairman

born 1961, M.Sc. (Econ.)

CEO, Finnair Oyj

Board member since 2009

Previous positions:

Several positions with Nokia since 1991 in several management positions in sales, marketing, strategy, and business development in Asia, North America, and Europe. Chief Operating Officer of Nokia Siemens Networks until the end of 2009.

Board member at:

The Finnish Fair Corporation (Supervisory Board),

Service Sector Employers PÄLTA ry (Board of Directors)

Confederation of Finnish Industries,

Elisa Oyj

No Vacon Plc shares

Riitta Viitala

member

born 1959, PhD. (Econ.)

Professor, Head of

Department of Management, University of Vaasa

Board member since 2008

Previous positions:

Positions at the University of Vaasa since 1999,

Training Manager,

Chydenius Institute of the University of Jyväskylä 1997-1998, education and development positions at the Central Ostrobothnia and Helia Universities of

Applied Science 1989-1996, Personnel Development Manager at the Finnish Postal Service 1983-1989, Administration Manager, Tapio Laakso Oy 1982-1983

Board member at:

Ilkka-Yhtymä Oyj,

I-Mediat Oy,

Vaasan Sähkö Oy,

Board member at the Vaasa division of the Ostrobothnia Chamber of Commerce

Stefan Wikman

secretary

born 1956, LL.M. (Law)

Partner of Roschier Attorneys Ltd.

Previous positions:

KWH Plast Ltd, Managing Director 1991-1994, member of group management in KWH Group Ltd. 1990-1994, general counsel of KWH Group Ltd 1986-1989. Lawyer at the Union Bank of Finland, lawyer and partner of the law firm V. Niinikangas Ky.

Board member at:

Fastighets Ab Academiill,

Harry Schaumans Stiftelse (chair),

Ostrobothnia Chamber of Commerce

Delegation member at:

Stiftelsen för Åbo Akademi,

Högskolestiftelsen i

Österbotten

No Vacon Plc shares

EXECUTIVE MANAGEMENT TEAM
GOVERNANCE AND MANAGEMENT

Vesa Laisi

President and CEO
born 1957, M.Sc. (Eng.), M.Sc. (Econ.)
Employed by the company since 2002.

Previous positions:

Director, Sales and Marketing of Vaisala Corporation 2000–2002, Vice President of ABB Industry Oy 1995–2000, Profit Center Manager at ABB Industry Oy 1993–1995, Director, Sales and Marketing at ABB Industry Oy 1988–1993, Product Engineer at Stromberg UK Ltd 1986–1988, and Development Engineer at Strömberg Electronics factory 1982–1986

Board member at:

Federation of Finnish Technology Industries Economic Information Office, TAT,
The Switch Engineering Oy,
VNT Management Oy

Vacon Plc shares: 19,351

Heikki Hiltunen

Executive Vice President, Market Operations, Deputy to the CEO
born 1962, B.Sc. (Eng.)
Employed by the company since 2002.

Previous positions:

Managing Director of Tellabs Oy and Vice President & General Manager for Europe, the Middle East, and Africa (EMEA) of Tellabs International 2000–2002. Sales, marketing and R&D director at Honeywell Industrial Automation in Finland, the USA, and Germany 1992–2000. Various positions in project, R&D and product marketing at Ahlstrom Automation Oy in Finland and Germany 1986–1992

Board member at:

Exel Composites Oyj,
Hockey-Team Vaasan Sport Oy (chair)

Vacon Plc shares: 11,207

Jukka Kasi

Executive Vice President, Product Operations
born 1966, M.Sc. (Eng.)
Employed by the company since 1997

Previous positions:

Vice President, Corporate Development, Vacon Plc 2009–2011, Vacon Suzhou Drives Co. Ltd. Managing Director 2007–2008, Vacon Plc Vice President, Component Customers 2003–2006, Vacon Plc Vice President, R&D 1999–2003, Vacon Plc Project Manager 1997–1998, Product Development Manager at ABB Transmit Oy 1996–1997, Project Manager at ABB Power 1994–1996, ABB Drives Inc. USA: AC drive designer 1992–1994, ABB Small AC drives: product design 1990–1992

Vacon Plc shares: 57,065

Eriikka Söderström

CFO (until February 5, 2013)
born 1968, M.Sc. (Econ.)
Employed by the company since 2009

Previous positions:

CFO at Oy Nautor Ab, Corporate Controller at Nokia Siemens Networks, various financial management positions at Nokia Networks (e.g. Director, Business Control and acting CFO)

Board member at:

Comptel Oyj

Vacon Plc shares: 4,793

Tuula Hautamäki

Senior Vice President, Human Resources
born 1964, M.Sc. (Eng.), M.Sc. (Econ.)
Employed by the company since 2000

Previous positions:

Vacon Plc's Vice President of Process Development 2000–2009, Process Development Manager at ABB Substation Automation Oy 1996–2000, Quality Manager at ABB Transmit Oy 1994–1996, Product Manager at ABB Power Oy 1991–1994, and Design Engineer at ABB Voimansiirto Oy 1989–1991

Vacon Plc shares: 12,728

VACON PLC | ANNUAL REPORT 2012

CORPORATE RESPONSIBILITY

SUSTAINABLE GROWTH AND EXPERTISE

Responsibility is the foundation of Vacon’s business operations and manifested in all of the company’s operations, philosophy, and management. The company aims to offer sustainable solutions that help meet global climate objectives. As a responsible company, Vacon develops its global operations from the perspectives of ecological and social well-being and profitable growth.

INTRODUCTION

VACON DEVELOPS SUSTAINABLE ENERGY SOLUTIONS FOR THE FUTURE

Growth in industrialization and urbanization is continuously increasing the need for electric motors everywhere in the world. According to various estimates, electric motors consume as much as one third of all the energy produced in the world. Therefore, improving the efficiency of the use of motors plays a significant role in finding ways to reduce energy consumption. The most effective way to reduce the energy consumed by an electric motor is to equip the motor with an AC drive.

The objective of the European Union's climate and energy package is to reduce greenhouse emissions and energy consumption by 20 percent and increase the share of renewable sources of energy in energy production to 20 percent by 2020. Vacon's products and solutions help achieve this goal, since they can help save energy, reduce greenhouse emissions, and utilize renewable sources of energy more efficiently.

Responsibility is the foundation of Vacon's business operations, and it is manifested in all of the company's operations, philosophy, and management. As a responsible company, Vacon develops its global operations from the perspectives of ecological and social well-being and profitable growth.

VACON'S MAIN THEMES IN CORPORATE RESPONSIBILITY

Development of sustainable energy solutions

Vacon develops and offers products that help increase energy-efficiency and the use of renewable sources of energy. Vacon wants to participate in creating a sustainable future and believes that its products are important in finding solutions to meet shared climate objectives.

Apart from saving energy, Vacon's AC drives can produce clean energy. In the production of wind and solar power, Vacon's AC drives direct electricity produced by a wind turbine or solar power plant into the grid in the correct way. In 2012, the amount of renewable energy produced with Vacon's products was approximately 20 TWh. Producing an equivalent amount of energy using coal would generate an estimated 17 million tonnes of carbon dioxide.

> In 2012, the amount of renewable energy produced with Vacon's products was approximately 20 TWh. Producing an equivalent amount of energy using coal would generate an estimated 17 million tonnes of carbon dioxide.

Well-being and sustainable growth

Vacon's economic responsibility aims to increase well-being through profitable growth. The company's goal is to expand its business operations and create new jobs.

Vacon works to ensure profitability through a long-term growth strategy, by complying with good corporate governance and management in its business operations, and by regularly assessing risks. According to Vacon, profitable growth requires taking care of the environment, personnel, and the society around us. As a global player, Vacon values competent and healthy personnel, now and in the future.

Environmentally conscious operating methods

Vacon continuously strives to reduce the harmful environmental impact of its operations through more energy-efficient operations, reduced transport emissions, and development of environmentally conscious solutions.

Vacon strives to reduce the environmental impact of the entire life cycle of

INTRODUCTION CORPORATE RESPONSIBILITY

its products as early as in the product development stage. The environmental perspective is taken into consideration in the selection of components and materials, and the company's subcontractors are also required to apply responsible operating methods and sound management of environmental matters. In addition, special attention is paid to the eco-friendliness of services and recyclability of products.

RESPONSIBLE OPERATIONS IN COOPERATION WITH STAKEHOLDERS

Vacon considers work with stakeholders an important part of responsible operations. Vacon engages in continuous and open dialog with its stakeholders, and such dialog is also utilized in the development of the company's business operations. The dialog enables Vacon to understand the development of the society better and to define the company's corporate responsibility objectives more extensively.

DID YOU KNOW that in 2012, Vacon's AC drives helped to save approximately 50 TWh of energy. This corresponds to the production capacity of approximately nine nuclear reactors.

Customers. Vacon continuously aims to improve cooperation with its customers. Open dialog and on-going customer feedback play an important role in Vacon's solutions, services, and the development of the company's operations overall.

Personnel. Competent and motivated personnel are a significant asset that helps Vacon reach its objectives. The company works continuously to improve personnel well-being and focuses on competence development and occupational safety.

Shareholders and investors. Vacon is a listed company and its owners expect profitable growth and success in the global market. Shareholders also expect the company to carry out good risk management and apply a functioning governance and management system. For shareholders, Vacon is a company that develops and offers solutions to global challenges regarding sustainable development.

Subcontractors and partners. Vacon purchases the components and materials for its products from a global subcontractor network. Subcontractors must commit to Vacon's responsibility requirements and operate in an ecologically, socially and

financially responsible manner. Compliance with the requirements is monitored as part of supplier evaluations.

Media. The media is an important stakeholder and central to providing other stakeholders with information on Vacon's operations. Proper management of media relations calls for active, reliable, and transparent communication regarding the company's operations.

Other stakeholders. Vacon is a locally significant player in the countries in which it operates, creating jobs and well-being directly and indirectly. The company works in on-going and open collaboration with the authorities, organizations, schools, universities, and research institutions.

VACON'S CORPORATE RESPONSIBILITY REPORTING

The objective of Vacon's corporate responsibility reporting is to openly disclose the company's responsibility policies, views, and objectives. Vacon develops the coverage of reporting to serve better the information needs of stakeholders.

The 2012 corporate responsibility reporting covers, as applicable, Vacon's production units in Finland, China, the

DID YOU KNOW that Vacon's operations are driven by two goals important in terms of responsibility:

1% of the world's electricity consumption is saved with Vacon's products
5% of the world's renewable energy is produced with Vacon's products

United States and Italy, as well as the semi-finished products plant in India. Economic responsibility reporting covers the entire Group. Social responsibility reporting covers the entire Group, as applicable. The main focus continues to be on operations in Finland, since the majority of personnel work in Finland. Since 2010, Vacon has applied the G3 version of the GRI (Global Reporting Initiative) guidelines in the corporate responsibility section of its annual report, and according to self-assessment, the content of the corporate responsibility report currently meets the criteria of Application Level C.

VACON PLC | ANNUAL REPORT 2012

ECONOMIC RESPONSIBILITY

STRONG FOOTHOLD IN SEVERAL INDUSTRIES

RESPONSIBILITY – THE FOUNDATION OF BUSINESS PERFORMANCE

For Vacon, economic responsibility means increasing well-being through profitable growth. Successful and expanding operations create a positive impact for the company's stakeholders, such as shareholders, employees, subcontractors and, eventually, for society as a whole through jobs, investments and taxes. Economic profitability also provides the company with the prerequisites to take care of its social and environmental responsibility.

The year 2012 was a challenging one for Vacon, but regardless, the company continued on a path of growth. Globally, the continued difficult economic situation weakened results in the solar and wind energy industries, but a strong presence in other industries counterbalanced the lower demand for products designed for the production of renewable energy. In the other industries, Vacon was able to increase its revenues.

FINANCIAL TARGETS REMAIN UNCHANGED

Vacon's goal is to achieve revenues of EUR 500 million in 2014. The long-term profitability target is an operating profit of 14 percent of revenues (EBIT %) and a return on equity (ROE) of more than 30 percent. In 2012, Vacon Group's revenues increased to EUR 388.4 million (EUR 380.9 million in 2011). Operating profit was 9.7 percent of revenues (6.5 percent) and return on equity was 25.8 percent (18.7 percent).

WELL-BEING THROUGH PROFITABLE OPERATIONS

In 2012, Vacon paid salaries and other remunerations of a total of EUR 62.7 million and paid dividends of EUR 14.3 million to its shareholders. The amount of purchases made by the company was a total of EUR 260.1 million. Vacon spent EUR 14.0 million on investments. During the financial period, the company paid EUR 10.2 million in taxes.

The economic impact of Vacon's business operations is far-reaching. Direct economic impacts, such as salaries, taxes, and dividends, also have social multiplier impacts. For example, cooperation with subcontractors creates business opportunities and jobs in different operating countries. Salaries impact consumption and, in that way, the vitality of other business operations. In addition, taxes paid by Vacon and by its employees on their income affect the well-being of the entire society.

BUSINESS MANAGEMENT AWARDS

In 2012, Vacon was awarded as the second-best company in Finland in the Mid Cap category of the IR Nordic Markets study. In the same category, CEO Vesa Laisi was awarded as the second-best CEO in Finland. IR Nordic Markets is a joint comparison study of listed companies by the research company Regi and NASDAQ OMX.

In addition, a reputation survey conducted by the Arvopaperi securities magazine ranked Vacon as the eighth best company in Finland.

DIRECT ECONOMIC IMPACT

Sales income from customers: EUR 388.4 million
Other items: EUR 0.2 million
New loans: EUR 13.5 million

VACON

Purchases: EUR 260.1 million
Salaries and other personnel remuneration: EUR 62.7 million
Taxes and social expenses: EUR 24.6 million
Net financial expenses to creditors: EUR 0.9 million
Dividends to investors: EUR 14.3 million
Business acquisitions and expansion investments: EUR 14.0 million
Loan repayments to financiers: EUR 21.5 million

ENVIRONMENTAL RESPONSIBILITY
CORPORATE RESPONSIBILITY

ENVIRONMENTALLY CONSCIOUS TECHNOLOGY

Vacon's environmental responsibility is based on products, solutions, and applications which help save energy and reduce greenhouse emissions, particularly carbon dioxide emissions.

The company's products are used extensively in different industries to improve energy-efficiency, utilize new sources of energy, and reduce greenhouse gas emissions.

Vacon develops increasingly sustainable energy solutions for its customers, improves the eco-friendliness of the product life cycle, and continuously seeks more ecological operating methods. In 2012, the company successfully continued the environmental responsibility projects launched in the previous year. The development projects were related to the company's products, processes, and the improvement of environmental management systems.

LIFE CYCLE PHILOSOPHY GUIDES PRODUCT DESIGN AND DEVELOPMENT

Vacon's product design and development are guided by the life cycle philosophy, from the selection of materials all the way to production and recycling. The product development stage includes an environmental impact assessment and definition of objectives which will be assessed throughout the product life cycle. The company works to improve the quality and reliability of its products. This will help save on, for example, maintenance and transportation costs and reduce emissions generated. R&D applies the principle of continuous improvement.

The main principles of environmentally conscious product design at Vacon include optimizing energy efficiency, minimizing substances harmful to the environment and people as well as improving recyclability.

In 2012, the Design for Environment checklist, drawn up in the previous year, was taken into use. The process instruction work launched in 2011 was completed, and the checklist was taken into use as part of the design process through pilot projects. The purpose of the checklist is to help use materials and resources more effectively and take all environmental considerations into account already at the beginning of product development. The Design for Environment checklist is part of environmentally conscious design, which ensures at the product development stage that products meet Vacon's internal environmental requirements as well as the requirements set by environmental legislation.

Carbon footprint calculations are an increasingly common method of measuring the eco-friendliness of production. A carbon footprint analysis was completed for the VACON® 100 HVAC AC drive as early as 2011, and in the coming years, similar analyses will be performed on other products as well.

Vacon continuously develops new products and solutions in which the eco-friendliness of the product itself and its purpose has been taken into consideration in the product development process. In 2012, the company introduced VACON® 100 FLOW to the market. This product is a new version of the VACON® 100 HVAC, equipped with special software. VACON® 100 FLOW is suited for water and pump applications in wastewater treatment plants, for example.

In 2012, the company observed that customers' environmental requirements for products became more stringent. Vacon provides its customers with a Declaration of Conformity on the materials used in its products. In 2012, Vacon complied with the REACH directive, among others, which concerns the registration and assessment of chemicals used in production. Furthermore, the company has taken measures to fully comply with the IEC 62474 standard which defines prohibited and restricted substances.

> DID YOU KNOW that Vacon's products and solutions are used in different industries to optimize processes in a sustainable manner:
> - Vacon's AC drives reduce energy consumption in building automation solutions by as much as 20–50%.
> - In the treatment of water and wastewater, Vacon's products and top-notch applications are used to control and monitor water pumps and reduce the mechanical stress caused by hydraulic impacts on the pipes.
> - In Vacon's customized products for elevator solutions, the technical features make it possible to feed the braking energy back into the electrical grid and to reduce standby energy consumption.

VACON PLC | ANNUAL REPORT 2012

ECONOMIC RESPONSIBILITY

HIGH-QUALITY PRODUCTS THROUGH ENERGY-EFFICIENT PRODUCTION

Environmental systems and programs

Vacon's plants in China and Vaasa, Finland, have ISO 14001 certifications. Vacon's objective is that the plants in Italy and the USA will also be ISO 14001 certified in 2013. With the certified environmental systems, Vacon works to ensure the effectiveness of environmental performance, uniform quality, and the principle of continuous improvement.

Environmental management is part of operations and quality management systems. Vacon has invested in the development and harmonization of the quality systems between different operating countries. The position of the quality organization strengthened in 2012, when the reorganization moved the quality function to be part of operations management. In 2012, Lean Six Sigma Black Belt coaching was also organized for all key persons in quality management with the objective of creating systematic methods for developing quality. The coaching strengthens the prerequisites for measuring and assessing effectiveness and environmentally conscious solutions.

All Vacon's business areas have their individual environmental objectives. The development managers are in charge of meeting the objectives and implementing operating methods that are aligned with them. Environmental matters are part of the company's annual evaluation. The personnel's environmental competence is developed by means of regular training.

ENERGY-EFFICIENCY OF PLANTS

Vacon's plants and operating methods are characterized by energy-efficiency and eco-friendliness. Vacon's plants in China and Italy operate in energy-efficient facilities completed in 2011. The plant in Italy meets the B requirement of the KlimaHaus certification, which means that its energy consumption is $< 50\mathrm{kWh} / \mathrm{m}^2$.

Vacon's new semi-finished products plant in India launched a GoGreen campaign at the end of 2011 with the objective of transforming practical operating methods into more sustainable and environmentally conscious ones. The campaign includes all employees of the plant, and produced good results throughout 2012.

Vacon's plant in the USA was again awarded the LEED Gold (Leadership in Energy and Environmental Design) certificate, which has been awarded to the plant since 2009. The green building LEED certificate requires that the plant adheres to ecological operating methods related to, among others, energy and water consumption as well as materials used in the building, and emissions.

In line with the energy saving commitment, lighting and solutions for generating savings in heating were modernized and the energy consumption of the testing system was streamlined at the Vaasa plant in 2012. The Vaasa plant also has a solar energy unit, installed on the roof in 2011. The unit is controlled with a VACON® 8000 SOLAR inverter. The unit's peak power is $55\mathrm{kW}$, and it helps reduce the amount of purchased electricity and also test interoperability between solar panels and inverters. The annual estimated amount of energy that the solar power unit produces for the plant is 35 MWh.

Energy generated in testing is fed back into the electrical grid using Vacon's own AC drive technology.

ENVIRONMENTAL RESPONSIBILITY
CORPORATE RESPONSIBILITY

ENVIRONMENTAL RESPONSIBILITY COVERS SUBCONTRACTORS

The materials and components used by Vacon have a direct effect on the environmental impact of the product life cycle. Therefore, cooperation between Vacon and its subcontractors has a central role in reducing the environmental impacts of products. Vacon sets high environmental requirements for components and materials in order to ensure the recyclability and safety of products.

Vacon procures the components it uses from carefully selected subcontractors in different parts of the world. Only the final assembly and testing of the products are carried out at Vacon's facilities. Therefore, Vacon's own production processes generate very low emissions. Energy is consumed by assembly, as well as testing the finished products. Testing also generates energy, which is fed back into the electrical grid using Vacon's own AC drive technology. This means the company has been able to reduce the amount of purchased energy.

The Supplier Excellence program, developed in 2011, was piloted successfully in Finland in 2012. The Supplier Excellence program assesses subcontractors' capability to produce products that meet Vacon's environmental requirements. Particularly with subcontractors, the focus is on identifying the use of prohibited and restricted substances and improving the transfer of information concerning materials. The principles of the Supplier Excellence program guide the selection of subcontractors. The operating model is holistic and includes frequent Supplier Operational Development meetings to assess and monitor subcontractors' operational prerequisites in terms of production, quality, and the environment. Vacon's objective is to have the Supplier Excellence operating model in place in all the company's operating countries in 2013.

VACON PLC | ANNUAL REPORT 2012
45

ECONOMIC RESPONSIBILITY

PRODUCTION CLOSE TO THE CUSTOMER

Delivering components to Vacon's plants and transporting finished products to customers cause environmental emissions. In Europe, road transport is the primary means of delivery. Deliveries to customers outside Europe have typically been transported by air since the required delivery times are often short and keeping custom-designed products in the warehouse is practically impossible.

Vacon continuously studies different alternatives to reduce the volume of air cargo and thus decrease the harmful environmental effect of transport. Vacon's intra-plant transportation need is reduced by the fact that, in addition to the Vaasa plant, Vacon's extensive product portfolio is manufactured at the other Vacon plants as well. For example, in 2012 the production of the VACON® 100 HVAC AC drive was also launched in the USA. In this way, production takes place closer to the customer, which provides savings in transportation costs and reduces emissions caused by transport.

KEY FIGURES FOR VACON GROUP'S PRODUCTION PROCESS

	2012	2011	2010	2009	2008
Consumption of electrical power, MWh	15,443	14,064	16,368	14,215	12,413
Electricity fed back into the test grid, MWh*	16,677	17,637	19,676	20,000	16,000
Recycling of electronic waste, tonnes	43.4	44.7	45	27.6	17.3
Other recyclable material, tonnes	328.5	327.6	249.7	315	315
Hazardous waste, tonnes	6.3	5.8	6.5	2.9	5.9
KEY FIGURES FOR VACON GROUP'S PRODUCTION PROCESS BY OPERATING COUNTRY
	Vacon Group	Finland	China	India	Italy
Consumption of electrical power, MWh	15,443	11,558	2,269	84	460
Electricity fed back into the test grid, MWh*	16,677	15,540	1,082	0.5	0
Recycling of electronic waste, tonnes	43.4	27.5	11.1	0	3
Other recyclable material, tonnes	328.5	222	65.5	20	11.7
Hazardous waste, tonnes	6.3	5.5	0.7	0	0.1

*Vacon's internal test grid recycled a larger amount of energy than the amount of energy purchased. Electrical energy generated during the AC drives loading tests was fed back to the grid. The electrical grid was only used for covering the energy lost in test system dissipation.

SOCIAL RESPONSIBILITY
CORPORATE RESPONSIBILITY

SUCCESS THROUGH SHARED VALUES AND EXPERTISE

Vacon aims to be a leading company in its field, and this objective shows in the company's HR policy, which covers all global operations. Vacon's HR policy is based on the company's values, continuous development of competence and well-being, as well as nurturing a passionate attitude. In the global and growing Vacon, creating a shared culture is increasingly important.

In 2012, Vacon's HR policy emphasized the development of the company's culture and management. In addition, job satisfaction and successful managerial work are important indicators which are monitored regularly and in a number of ways.

In 2012, the most significant projects covering the entire personnel included deploying Vacon's new values in everyday operations and the management development program. Well-being at work also received special focus. In addition, the company underwent reorganization in 2012. Apart from the successful projects and changes, the year 2012 was characterized by general economic uncertainty, which is why the company had to conduct statutory personnel negotiations in Finland.

THE NEW ORGANIZATION HARMONIZES THE CULTURE

Vacon underwent reorganization in 2012. The goal of the reorganization is to harmonize the Group's functions, increase effectiveness, and create a more uniform global culture. As a result of the reform, the HR functions as well as other support functions, for example, serve the Group's different operating areas globally as a uniform function.

COMPETENCE GIVES COMPETITIVE EDGE

For Vacon to achieve its future objectives, the company needs personnel with world-class know-how and skills. It is important for the company to strengthen personnel competence in areas which are critical in terms of the company's development. As a global company, Vacon wants to retain the best competence by offering versatile career paths and opportunities for job rotation between different operating countries.

At Vacon, competence development is based on the company's strategic objectives and development needs identified at various operations. Vacon applies the 70:20:10 principle in competence development: 70% of development takes place through learning

THE NEW VALUES WERE DEFINED TOGETHER

Vacon's new values were created together with personnel. Personnel in different operating countries gathered together in New Horizons Café workshops to discuss values and management principles. Based on the discussions, the new values were created:

STRONGER TOGETHER. Customers, partners and colleagues are at the heart of Vacon's operations. We work together to achieve our goals, and operate in a flexible manner to provide the best customer experience. By working together we create an inspiring, safe, sustainable and successful environment.

TRUST AND RESPECT. We trust each other and build our relationships on openness, respect and fairness. We believe work-life balance is essential for success.

TAKING OWNERSHIP. We take ownership and have a drive for achievement. We take initiative, have the courage to take on new challenges and the ability to make decisions.

PASSION FOR EXCELLENCE. We have a passion for excellence, quality and innovative solutions in all of our operations. We want to be the best.

The new values were presented in the Live the Values workshops organized in different operating countries, which were attended by every employee at Vacon. The workshops were dialogic and inclusive, with the goal of helping all Vacon's employees understand and internalize the values as part of their own jobs. In addition to the workshops, communicating the values also received a special focus in the company's internal channels. Based on personnel feedback, the launch of the new values succeeded very well. The new values have also been emphasized in interaction with the company's external stakeholders. For example, in customer relationships it is important for Vacon to be stronger together: to generate success together with the customer and to provide the best possible customer experience.

VACON PLC | ANNUAL REPORT 2012

SOCIAL RESPONSIBILITY

VACON LEAD RAISES MANAGEMENT SKILLS TO A NEW LEVEL

The objective of the Vacon Lead project was to improve leadership skills and the level of strategic thinking. The project concentrated mainly on people management.

In the Vacon Lead project, Vacon Leadership Excellence training was organized for the company's senior management in cooperation with Aalto University Executive Education Oy and London Business School.

As part of the Lead project, six office staff members from Vacon also participated in Svenska Handelshögskolan's Leap management consortium. The consortium was attended by management-level employees from Finnish and international companies. The purpose of the consortium was to raise the attendees' management skills to a new level through joint exercises and coaching.

The Vacon Lead project will also continue in 2013 by means of various measures. For example, five Vacon employees will attend the Leap management consortium in 2013.

Due to the reorganization, Vacon organized coaching related to the new organization in Finland, Italy, and India in 2012. Coaching will continue in China and the USA in 2013.

on the job and doing, 20% is learned from others and 10% is gained from courses and training programs.

Vacon continuously organizes training programs of varying scope. For example, Product Excellence training aims to ensure that the company's personnel have extensive AC drive competence. Sales Excellence training develops sales management and competence. The training programs cover best practices, serve as forums for sharing experiences and for discussing the shared rules of sales, among other issues. Overall quality and effectiveness are improved by means of Lean Six Sigma training, and in 2012, Lean Six Sigma Black Belt training was organized for key persons in the quality function. These training methods primarily apply guided project learning.

In 2012, operations in China had a strong focus on the development of career paths. Vacon's plant in China developed a program in 2012 which enabled plant workers to gradually advance their careers by means of on-the-job learning all the way to engineer positions, for example. Employees' professional development is supported and they are offered a variety of career opportunities within the company.

At Vacon, the competence development of each employee is monitored in development discussions, which the supervisor and the employee conduct once or twice per year. The development discussion reviews the past period and sets development targets and objectives for the next period. At the end of 2012, the company started developing a performance management process with improvement of the development discussion process as one aspect. The updated development discussion practice will be deployed in 2013.

Management is one of Vacon's most important areas for development, and in 2012, the Vacon Lead management development project was carried out.

COOPERATION WITH EDUCATIONAL INSTITUTIONS BRINGS IN NEW TALENT

For Vacon, it is important to maintain, develop, and increase world-class competence in the company. Therefore, Vacon seeks new talent by establishing contacts with students at student events and at fairs as well as in company visits and lectures. Vacon collaborates especially with students of technology. For students at vocational colleges and institutes of higher education, as well as those in the final stages of their studies, the company offers summer jobs and thesis work positions.

SOCIAL RESPONSIBILITY
CORPORATE RESPONSIBILITY

Vacon in India has been involved in recruitment work with a local institute focusing on industrial automation education since 2010, and with the International School of Business and Research in Bangalore since 2011. In China, Vacon works in close collaboration with vocational colleges where the company recruits new talent for permanent and internship positions. Promising automation engineers are recruited in collaboration with Shanghai University. Vacon's plant in the USA collaborates with Penn State University. In 2012, Vacon launched the construction of an R&D unit in North Carolina, which has resulted in collaboration with educational institutions in that area as well.

ETHICAL GUIDELINES AND HUMAN RIGHTS

In its operations, Vacon adheres to laws and regulations, acts ethically and produces high-quality work. The company takes responsibility for the environment and respects human rights and requires that its partners do the same.

The company complies with universally accepted human rights, children's rights and employees' rights. This means that Vacon is committed to, among other things:

providing a healthy and safe working environment and preventing risks relating to health and safety;
respecting freedom of association, and the freedom to be a member of a trade union;
not discriminating against job applicants and employees in any way. Everyone has equal opportunities in compensation, recruiting, access to training, and promotion regardless of race, gender, social status, origin, religion or political or other membership.
complying with laws and industry norms in terms of working hours and compensation;
refraining from using child labor, forced labor or any kinds of punishment;
prohibiting corruption and bribery in all operations. Vacon and its employees do not pay or accept bribes or unlawful payments.

SYSTEMATIC WORK TO INCREASE WELL-BEING

studies. In addition, supervisors and employees discuss matters concerning well-being and coping at work in development discussions, which are conducted at frequent intervals.

Vacon considers well-being at work to be a holistic matter which covers both mental and physical well-being. In 2012, various campaigns were organized to improve physical well-being. Vacon's plants Group-wide were encouraged to organize a sports day for employees. In the USA, Vacon promoted well-being by subsidizing employees' gym memberships. In addition, Vacon's plant in Chambersburg, PA, organized a Biggest Loser contest, in which teams of employees competed in weight loss and weight management. The impact of the contest on employee health and well-being was very positive, and healthy habits continued to be maintained after the contest.

In 2012, special attention was paid in China to the well-being of Vacon's employees and their families. The company and employees raised funds for those employees who had considerable financial difficulties. The company pledged to match the amount the employees raised among themselves. Eventually, financial support was provided for one family which was experiencing special hardships at the end of the year.

PROACTIVE AND PIONEERING OCCUPATIONAL SAFETY MEASURES

Vacon is a forerunner in occupational safety. The company aims to create a working environment with zero accidents. Vacon's management and personnel develop occupational safety in on-going cooperation. Occupational health and safety matters at the Vaasa plant are managed in accordance with the OHSAS 18001 standard, and the objective is to obtain OHSAS 18001 certification at all of the company's five plants by the end of 2014.

Vacon systematically assesses the hazards caused by work and working conditions using a comprehensive risk assessment model. Risk assessment aims to identify possible accidents, ergonomic, chemical and physical hazards, as well as mental stress. In addition to the company's own specialists, it also uses external specialists in risk assessments.

In 2012, a visual management operating model, launched at the plant in Finland in the previous year, was developed further. The operating model includes five indicators, one of which is safety. The status of each indicator can be reviewed on visual management boards, and production monitors the indicators on daily, weekly, and monthly levels. In practice, visual management means,

VACON PLC | ANNUAL REPORT 2012
49

SOCIAL RESPONSIBILITY

among other things, that employees themselves monitor their work environment and potential safety hazards. In 2012, the visual management operating model was harmonized and deployed at all Vacon plants. The results of implementing the operating model have been very positive.

Ergonomics is one of the specific challenges in the field, which is why surveys are continuously carried out in cooperation with occupational health care. As a result of this cooperation, the trend of increasing musculo-skeletal problems has been stopped. Efforts to make factory work lighter and reduce the frequency of heavy lifting have succeeded.

All Vacon's plants in Finland, the USA, China, India and Italy have occupational safety committees which are responsible for maintaining and developing safety at work.

SATISFIED EMPLOYEES AS A GOAL

The level of job satisfaction is monitored annually through a group-wide job satisfaction survey. In 2012, the response rate of the survey was very high: 89%. The results show a mainly positive development trend.

The publication of Vacon's new values showed in the results. The personnel felt they understood the company's values and considered them to be good. Pressure at work was considered to be slightly lower and cooperation and the flow of information were better. Employees' willingness to take personal responsibility increased again, and in this respect, the result in 2012 was excellent. The management of the company was considered to have improved. The induction of new employees was also seen as effective.

According to the survey, areas for improvement included fairness, security and stability provided by the employer, the meaningfulness and purpose of work, as well as the competitiveness of salaries. Vacon's image as an employer was also considered to be an area for improvement. The results reflect the statutory personnel negotiations conducted in the company in 2012, which impacted personnel's sense of security and the employer image.

In 2012, improving job satisfaction received special focus in China. Inclusiveness of management and communications was developed at Vacon's plant in China. For example, the plant organizes a quarterly luncheon for the management and teams, which offers a forum for discussions on Vacon's operations and for socializing among colleagues. In addition, common Tea Party events are organized for all supervisors at the plant in China at frequent intervals. These events focus on, for example, quality, production, well-being at work, and the company's strategy. Experiences of increasing open discussion at the plant were very positive during the year.

RECRUITMENT AND PERSONNEL NEGOTIATIONS

The number of Vacon Group's employees increased by 45 people in 2012. Most of the new employees were recruited in the Asia Pacific region, and nearly as many were hired in Europe, the Middle East and Africa. At the end of 2012, Vacon had 1,513 employees.

The prolonged global financial crisis affected Vacon's operations. In December 2011, the company had to start statutory personnel negotiations which ended in February 2012, affecting office staff in Finland. As a result of the negotiations, 19 people had to be laid off. The need for reduction was estimated at 60 people at the beginning of the negotiations. The personnel negotiations were due to the economic situation, production levels and reasons related to the possible reorganization of Vacon.

REMUNERATION AND BENEFITS

Remuneration at Vacon is based on the work requirement level and personal performance. Remuneration and employment contracts are based on general agreements and individual solutions. All employees are enrolled in a bonus scheme based on the company's revenues and profit earned. In addition, the company has a share-based incentive scheme that offers the covered employees the opportunity of long-term ownership of the company's shares.

In 2012, Vacon launched a Group-wide remuneration development project, in which office staff positions were assessed globally and titles were also harmonized. The assessment was completed for the entire Group in 2012.

ELECTRONIC MONITORING OF CUSTOMER SATISFACTION

Vacon aims to respond quickly and effectively to customer feedback and needs. This can only be accomplished through seamless, trust-based cooperation. Vacon wants to engage in open dialog with its customers and therefore the monitoring of customer satisfaction has also been developed systematically. Customer satisfaction is monitored and measured on a monthly basis.

In 2011, Vacon adopted the Customer Relationship On-Line (CROL®) process for measuring and monitoring customer satisfaction in Finland. In 2012, the CROL® pro

SOCIAL RESPONSIBILITY
CORPORATE RESPONSIBILITY

cess was expanded to all operating countries in Northern Europe as well as the UK and the United States. The implementation of the process will be expanded also to other countries in 2013.

The goal of the CROL® process is to improve cooperation with customers and to monitor customer satisfaction on an on-going and systematic basis, resulting in tangible development measures. The process has provided expected benefits for measuring and monitoring customer satisfaction. Customer feedback received through the process clearly indicates how satisfied the customer is immediately after a sales, ordering, delivery or maintenance measure. The electronic feedback goes directly to the account manager, and the company can react to the feedback quickly. The results and customer feedback are reported to the company management, which utilizes the reporting in strategic planning.

Developing electronic customer service is one of the main focus areas of Vacon's operations development.

PRODUCT RESPONSIBILITY

Vacon makes sure that its products meet the requirements set in product safety laws and decrees. Equipment is tested in accordance

with extensive safety testing standards, and the test results are verified by a third party.

Vacon also ensures that the commissioning, use and decommissioning of its products is safe and reliable. The company provides customers with detailed information in its manuals and instructions and organizes extensive training packages. Training is provided in several countries and customized according to the customer's needs.

Vacon's extensive global maintenance service network with 80 service centers in 48 countries ensures service and other maintenance services for all of Vacon's brands. Preventive maintenance safeguards the use of and prolongs the life of an AC drive. In addition to this, Vacon offers 24/7 technical service over the phone.

LEGAL PROCEEDINGS AGAINST VACON ON CUSTOMS PROCEDURES

The lawsuit pending against Vacon's subsidiary in China since 2011 concerning the company's customs clearance procedure continued in a higher court in 2012, as two litigants appealed the judgment issued by the lower court in December 2011. It is possible that the judgment will change for Vacon in the higher court, but the matter is

still uncertain. Vacon made a provision due to the pending lawsuit in December 2011.

In the future, Vacon will be stricter concerning local customs regulations. In its global operations, Vacon's unambiguous policy is to comply with both local and international laws, rules, and regulations.

SUPPORT FOR WORK WITH YOUNG PEOPLE

Among Vacon's most important social and European channels of influence are the Federation of Finnish Technology Industries and the Confederation of Finnish Industries. Vacon also participates in the CleanTech Finland network, which promotes the operations of the best Finnish cleantech companies in international markets. Local decision-makers in locations where Vacon operates are important players in the building of a regional development environment.

Vacon considers it important to support work with young people. Vacon is the main cooperation partner of the Sail Training Association Finland (STAF) and supports the Sails for Environment environmental protection program of STAF, offering marginalized young people opportunities to gain new experiences and learn cooperation skills through the foundation.

In addition, Vacon sponsors the Team Kalle Palander alpine ski team for young people. The cooperation aims to offer promising young alpine skiers opportunities to develop their skills. The company also supports Alpine Ski Team Finland, and locally partners with Hockey-Team Vaasan Sport Oy.

Vacon selects its sponsorship recipients carefully. Vacon supports young, emerging collaboration partners who share similarities with Vacon's brand. Politically, Vacon is independent and therefore does not support political parties in Finland or elsewhere in the world.

VACON PLC | ANNUAL REPORT 2012

SOCIAL RESPONSIBILITY KEY FIGURES 2012

PERSONNEL BY FUNCTION

PRODUCTION	47.5%
SALES AND MARKETING	28.5%
R&D	17.8%
SUPPORT FUNCTIONS	6.2%

PERSONNEL BY REGION

EUROPE, THE MIDDLE EAST, AND AFRICA	64.3%
ASIA PACIFIC	28.3%
NORTH AND SOUTH AMERICA	7.4%

GENDER DISTRIBUTION

NEW RECRUITMENT BY REGION

NEW RECRUITMENT BY REGION

EUROPE, THE MIDDLE EAST, AND AFRICA	47.3%
ASIA PACIFIC	46.8%
NORTH AND SOUTH AMERICA	5.9%

LEVEL OF EDUCATION

BACHELOR'S DEGREE OR ENGINEERING DEGREE	35.0%
VOCATIONAL EDUCATION	24.5%
SECONDARY SCHOOL	21.2%
MASTER'S DEGREE	18.2%
LICENTIATE OR DOCTOR DEGREE	1.1%

ACCIDENTS AND CLOSE CALLS AT WORK, FINLAND

CLOSE CALLS 73
ACCIDENTS AT WORK 11

SOCIAL RESPONSIBILITY
CORPORATE RESPONSIBILITY

Personnel	2012	2011	2010	2009	2008
Number of personnel at the end of the period	1,513	1,468	1,339	1,228	1,197
Europe, the Middle East and Africa, %	64.3	67.4	69.1	71.2	74.6
North and South America, %	7.4	7.1	6.4	6.6	6.7
Asia Pacific, %	28.3	25.5	24.5	22.2	18.7
Women, %	25.6	26.2	27.2	27.5	29.2
Men, %	74.4	73.8	72.8	72.5	70.8
Share of R&D personnel, %	17.8	15.7	15.0	13.8	13.0
Personnel key figures	2012	2011	2010
---	---	---	---
Employed by the Group, persons on average	1,468	1,470	1,301
Personnel average age, years	36.7	36.3	36.2
Average duration of employment, years	6.2	5.8	5.7

VACON PLC | ANNUAL REPORT 2012
53

GRI CONTENT INDEX

VACON PLC'S CORPORATE RESPONSIBILITY REPORTING IN ACCORDANCE WITH APPLICATION LEVEL C OF THE GRI GUIDELINES

Application levels of the GRI reporting guidelines*

Application level	C
G3 profile information	To be reported: 1.1, 2.1-2.10, 3.1-3.8, 3.10-3.12, 4.1-4.4, 4.14-4.15
Description of the G3 governance system	Not required
G3 indicators	A minimum of ten indicators are reported, including at least one indicator for each of the following areas: social responsibility, economic responsi- bility and environmental responsibility.

For more information, please see www.globalreporting.org

Vacon Plc reports on corporate responsibility in accordance with the GRI Reporting Guidelines Application Level C. The report has not been verified externally.

Content index key

Indicator type	Level of GRI reporting
C = Core indicator	X = Reported in accordance with GRI
A = Additional Indicator	O = Reported in part
	- = Not reported for 2012
	GRI-compliant content
---	---
Strategy and analyses
1.1	Review by the CEO
Organization
2.1	Name of the organization
2.2	Primary brands, products, and/or services
2.3	Operational structure of the organization
2.4-2.5	Location of organization's headquarters and the countries where the organization operates
2.6	Nature of ownership and legal form
2.7	Markets served
2.8	Scale of the reporting organization
2.9	Significant changes during the reporting period regarding size, structure, or ownership
2.10	Awards received in the reporting period

GRI CONTENT INDEX CORPORATE RESPONSIBILITY

GRI-compliant content	Application of GRI	Comments	Pages
Report profile, scope and boundary
3.1-3.3	Reporting period, date of most recent previous report, and reporting cycle	O Corporate responsibility is reported annually as part of the Annual Report. For more information, please see Vacon's website.	41
3.4-3.5	Contact point for questions regarding the report or its contents, process for defining report content	X	41, 112
3.6-3.8	Boundary of the report	X	41
3.10-3.11	Re-statements of information provided in earlier reports and significant changes from previous reporting scope or measurement	X No significant changes in the measurement methods.	41
GRI content index
3.12	GRI content index	X	54-57
Governance, commitments, and engagements
4.1-4.4	Governance structure of the organization, mechanisms of the shareholders and employees to provide recommendations or directions to the Board of Directors	X	29-37
Stakeholder engagement
4.14-4.15	Definition of stakeholder groups and stakeholder engagement practices	X	4-5, 41, 48-51
Economic responsibility
Economic performance
C EC1	Direct economic value generated	X	42
C EC2	Financial implications and other risks and opportunities for the organization's activities due to climate change	O Vacon develops products and solutions to solve the challenges posed by climate change.	2, 40-41
C EC3	Coverage of the organization's defined benefit plan obligations	O Vacon also adheres to the legislation of the countries in which it operates regarding pension obligations.	34
C EC4	Significant financial assistance received from government	O	42
Market presence and economic impact
C EC5	Range of ratios of standard entry-level wage compared to local minimum wage at significant locations of operation	O For more information, please see 'Ethical guidelines and human rights'.	49
C EC6	Spending on locally-based suppliers at significant locations of operation	O Vacon aims to make strategically effective procurements and invests in a global network	10-11, 41, 42
C EC7	Procedures of local hiring	X	48-49, 52
Indirect economic impact
C EC8	Development and impact of infrastructure investments and services	O	42
Environmental responsibility
Materials
C EN1	Materials used by weight or volume	O	43-46
C EN2	Percentage of materials used that are recycled input materials	O	46

VACON PLC | ANNUAL REPORT 2012

GRI CONTENT INDEX

	GRI-compliant content	Application of GRI	Comments	Pages
Energy
C EN3-4	Direct and indirect energy consumption by primary energy source	O		46
A EN5	Energy saved due to conservation and efficiency improvements	X		43-44
A EN6	Initiatives to provide energy-efficient or renewable energy-based products and services, and reductions in energy requirements as a result of these initiatives	X		43-44
Water
C EN8	Total water withdrawal by source	O	Overall, the significance is low since water is not used in Vacon's production processes.
Emissions, effluents, and waste
C EN16	Total direct and indirect greenhouse gas emissions by weight	O	Emissions are mainly generated by the production of the energy used. Vacon's products and solutions reduce energy requirements and the generation of greenhouse gases.	40, 43-44
C EN22	Total weight of waste by type and disposal method	X		46
A EN24	Volume of hazardous waste treated	X		46
Products and services
C EN26	Initiatives to mitigate environmental impacts of products and services	X		43-44
C EN27	Percentage of products sold and their packaging materials that are reclaimed by category	-	Vacon has launched a program to reuse defective equipment.
Compliance
C EN28	Monetary value of significant fines and total number of non-monetary sanctions for noncompliance with environmental laws and regulations.	O	None in 2012.	43
Transport
A EN29	Significant environmental impacts of transporting products and other goods and materials used for the organization's operations, and transporting membership of the workforce	O	The majority of internal meetings, training sessions, etc. are held via videoconferencing.	45
Overall
A EN30	Total environmental protection expenditures and investments by type	O	Development of production and logistics is underway.	4-5, 43-46
Social responsibility
Product responsibility
C PR1	Life cycle stages in which health and safety impacts of products and services are assessed for improvement	X		39, 50-51
A PR2	Compliance with product safety legislation and regulations	X		51
C PR3	Type of product and service information required by procedures	X		43, 51
A PR4	Total number of incidents of non-compliance with regulations and voluntary codes concerning product and service information and labeling	X		51

GRI CONTENT INDEX
CORPORATE RESPONSIBILITY

	GRI-compliant content	Application of GRI	Comments	Pages
A	PR5	Practices related to customer satisfaction, including results of surveys measuring customer satisfaction	X	50-51
Employment
C	LA1	Total workforce by employment type (full-time/part-time), employment contract (permanent/temporary), and region	-
C	LA2	Total number and rate of employee turnover by age group, gender, and region	O	52-53
A	LA3	Benefits provided to full-time employees that are not provided to temporary or part-time employees	X	50
C	LA4	Percentage of employees covered by collective bargaining agreements	O	50
C	LA5	Minimum notice period(s) regarding significant operational changes, including whether it is specified in collective agreements	O	50
A	LA6	Percentage of total workforce represented in formal joint management-worker health and safety committees	X	49-50
C	LA7	Rates of injury, occupational diseases, lost days and absenteeism by region	O	52
C	LA8	Education, training, counseling, prevention and risk-control programs in place to assist workforce members, their families, or community members regarding serious diseases	X	49-50
C	LA10	Average hours of training per year per employee by employee category	O	47-48
A	LA11	Programs for skills management and lifelong learning that support the continued employability of employees and assist them in managing career endings	O	47-48
A	LA12	Percentage of employees receiving regular performance and career development reviews	X	48
C	LA13	Breakdown of governance bodies and employees according to gender, age group and minority group membership	X	37, 49, 52-53
Human rights
C	HR1-HR2	Percentage of significant suppliers and contractors that have undergone screening on human rights and actions taken	O	See the Ethical Guidelines applicable to all Vacon’s suppliers. 44-45, 49
A	HR3	Total hours of employee training on policies and procedures concerning aspects of human rights that are relevant to operations, including the percentage of employees trained	O	Human rights training is included in Vacon’s orientation program. See the Ethical Guidelines. 49
C	HR4	Total number of incidents of discrimination and actions taken	X	None in 2012. See the Ethical Guidelines. 49
C	HR6-HR7	Operations identified as having significant risk for incidents of child labor or forced labor, and measures taken to contribute to the elimination of child labor or forced labor	O	None in 2012. See the Ethical Guidelines. 49
Society
C	SO3	Percentage of employees trained in organization’s anti-corruption policies and procedures	O	See the Ethical Guidelines. 49
C	SO5	Public policy position and participation in public policy development and lobbying	X	51
A	SO6	Total value of financial and in-kind contributions to political parties	X	51

The GRI Guidelines core indicators EN11-12, EN17, EN19-21, EN23, PR6, PR9, LA14-15, LA8, LA14, HR10-11, SO1-2, SO4 and SO8-10 have not been reported.

VACON PLC | ANNUAL REPORT 2012

FINANCIAL STATEMENTS

BOARD OF DIRECTORS' REPORT JANUARY 1-DECEMBER 31, 2012

GENERAL REVIEW OF 2012

According to preliminary market research information and Vacon Group's (Vacon) estimate, the AC drive market did not grow significantly during 2012. The situation was most difficult in Europe, where the market even declined from the previous year. The markets in Asia and North America grew slightly from the previous year.

Vacon's revenues and orders increased in 2012 from the comparison period. Sales increased in 2012 in the building automation and offshore industries, in particular. By contrast, sales in the production of solar and wind power declined steeply and only amounted to 3% of the company's revenues in 2012, whereas they were 13% in 2011. In 2012, Vacon was able to compensate for the decline in the sales of products for renewable energy production by increasing its sales to other industries and, at the same time, it was able to increase its market share.

Vacon's revenues grew strongly in the Asia Pacific (APAC) region in 2012. Sales developed favorably also in North and South America. In Europe, the Middle East and Africa (EMEA), sales decreased slightly in 2012 due to weak demand for products designed for production of renewable energy and the general economic development in the region. Full year revenues in the EMEA region grew slightly from the previous year, if renewable energy is not included.

The Group's profitability, measured by operating profit percentage, increased in 2012. Profitability improved particularly in the second half of 2012. Vacon carried out several measures in 2012 to improve profitability. The most important of these was the transfer of material sourcing to low-cost countries. Last year, 50% of material sourcing was from low-cost countries (40% in 2011).

Vacon introduced several new products to the market in 2012. In March, the company introduced the updated versions of its VACON® NXP AC drives. In June, Vacon launched three new products at its sales conference: VACON® 100, VACON® 100 X, and VACON® 20 X. Vacon continued new product launches in the last quarter of the year by bringing to the market the VACON® 100 FLOW product, which is the newest AC drive in the VACON® 100 series. It offers a wide range of flow control functions for water and waste water treatment and for building automation applications.

In 2012, Vacon continued to strengthen its global position by establishing a regional center in Singapore and a representative office in Kazakhstan.

RESULT

Orders and revenues

Vacon's orders in 2012 increased to EUR 401.9 million (EUR 365.3 million). The order book increased EUR 13.5 million from the beginning of the year, standing at EUR 50.0 (36.6) million at the end of the year.

In 2012, Vacon's revenues were EUR 388.4 (EUR 380.9) million, showing an increase of 2.0% compared to the corresponding period in the previous year. Vacon succeeded in increasing its revenues in 2012, particularly in the building automation and offshore industries. This compensated for the sales in renewable energy production, which had declined steeply.

Geographically, the strongest growth was seen in the Asia Pacific region, where revenues increased by 21.7% in 2012. Revenues developed well in North and South America as well, showing growth of 13.3%. Sales in the Europe, Middle East and Africa region declined 7.0% in 2012, as the result of weak demand for products for renewable energy production. In Europe the customer business sector that grew most was the marine and offshore industry. Nevertheless, revenues in Europe picked up towards the end of the year, and growth in the fourth quarter was 16.7% compared to the previous year. Vacon reports its regional sales based on the invoice addresses, not the final location of the products.

Vacon's revenues from OEMs increased considerably in 2012 compared to the previous year, whereas the share of system integrators has decreased. Most of the products for renewable energy generation are sold through the system integrators channel, which explains most of the fall in sales in that channel.

Operating profit and result

Operating profit was EUR 37.7 million and 9.7% of the revenues in 2012 (EUR 24.7 million and 6.5% in 2011).

In 2012, the company succeeded in collecting overdue receivables from one of its solar energy customers. One-time items related to the successful collection of the receivable had a net impact of EUR 1.5 million on the company's operating profit in 2012.

The Group's operating profit excluding one-time items was EUR 36.2 million and 9.3% of revenues in 2012 (EUR 34.8 million and 9.1%). Earnings per share were EUR 1.70, which showed an increase of EUR 0.60, or 54.0%, from the previous year.

The Group implemented measures for improving profitability in 2012. Of these, the most significant measure was the transfer of material sourcing to low-cost countries. In addition, Vacon has developed the cost-effectiveness of its operations further.

Balance sheet and cash flow

The net cash flow of operations was EUR 52.3 million in 2012 (EUR 26.8 million). The company has succeeded in improving the management of working capital in all areas.

Thanks to the strong net cash flow from operating activities the company's gearing was -9.5% (12.7%). The company was free of net debt, because its net debt stood at EUR -10.3 million at year end. The balance sheet total was EUR 206.9 (198.1) million. The equity ratio was 53.1% (50.0%). The Group's equity structure and liquidity remained strong. Interest-bearing debt at the end of 2012 totaled EUR 20.7 million.

INVESTMENTS

The Group's gross investments amounted to EUR 14.0 million in 2012 (EUR 18.7 million). Expenditure focused particularly on projects for developing new products and on developing production especially in China and Finland. In 2012, Vacon limited its investments in order to adjust expenses to the level of growth in the operations. The Group is equipped to expand its operations within the framework of the current production capacity.

BOARD OF DIRECTORS' REPORT
FINANCIAL STATEMENTS

RESEARCH AND DEVELOPMENT

R&D expenditure in 2012 totaled EUR 25.1 million (25.1 million), and EUR 4.5 million (EUR 7.0 million) of this was capitalized as development costs. The share of R&D costs of the Group's revenues was 6.5% (6.6%).

In 2012, Vacon continued to invest heavily in the development of new products, and the Group's global R&D functions strengthened around the world.

In December 2012, Frost & Sullivan, one of the most esteemed growth company consultants in the world, awarded Vacon with the 2012 European Low Voltage (LV) Alternating Current (AC) Electric Drives Product Line Strategy Award. The award is recognition of Vacon's capability to optimize its strategies, processes, and operations effectively.

FINANCIAL INSTRUMENTS VALUED AT FAIR VALUE

In the financial statements, forward exchange contracts are valued at fair value. The principles used are described in more detail in the accounting principles and notes to the financial statements.

RESPONSIBILITY

Personnel

Vacon aims to be the leading company in its field, and this objective is seen in the company's HR policy, which covers all global operations. Vacon's HR policy is based on the company's values, continuous development of competence and well-being, as well as nurturing a passionate attitude. In 2012, Vacon's HR policy emphasized the development of the company's culture and management. In addition, job satisfaction and successful managerial work are important indicators which are monitored regularly and in a number of ways.

Vacon's personnel increased by 45 people during 2012. At the end of December the Group employed 1,513 (1,468) people, and 708 (730) of these were in Finland and 805 (738) in other countries. As part of the company's reorganization and

measures to raise efficiency, on 19 December 2011 Vacon began statutory personnel negotiations concerning office staff working in Finland, and these were concluded on 15 February 2012. The negotiations resulted in annual savings corresponding to 45 man-years.

The average age of personnel was 36.7 (36.3) years. The average length of employment was 6.2 (5.8) years. 25.6% (26.2%) of employees were women and 74.4% (73.8%) were men.

Personnel key figures:

	2012	2011	2010
Average number during the year	1,468	1,470	1,301
Salaries and wages during the year, MEUR	62.7	55.9	52.5

Vacon underwent reorganization in 2012. The goal of the reorganization is to harmonize the Group's functions, increase effectiveness, and create a more uniform global culture. As a result of the reorganization, the HR functions as well as other support functions, for example, serve the Group's different operating areas globally as a uniform function.

In 2012, the most significant projects covering the entire personnel included deploying Vacon's new values in everyday operations and the management development program. Vacon's new values were created together with personnel. Based on the discussions, the new values were created:

STRONGER TOGETHER – Customers, partners, and colleagues are at the heart of Vacon's operations. We work together to achieve our goals, and operate in a flexible manner to provide the best customer experience. By working together we create an inspiring, safe, sustainable, and successful environment.

TRUST AND RESPECT – We trust each other and build our relationships on openness, respect, and fairness. We believe work-life balance is essential for success.

TAKING OWNERSHIP – We take ownership and have a drive for achievement. We take initiative, have the courage to take on new challenges and the ability to make decisions.

PASSION FOR EXCELLENCE – We have a passion for excellence, quality, and innovative solutions in all of our operations. We want to be the best.

For Vacon to achieve its future objectives, the company needs personnel with world-class know-how and skills. It is important for the company to strengthen personnel competence in areas which are critical in terms of the company's development. At Vacon, competence development is based on the company's strategic objectives and development needs identified at various operations.

Vacon applies a proactive approach to occupational health and well-being. The company conducts various surveys on the state of the work environment and working community and develops its HR policy and work atmosphere on the basis of these surveys and studies. In addition, supervisors and employees discuss matters concerning well-being and coping at work in development discussions, which are conducted at frequent intervals.

Vacon considers well-being at work to be a holistic matter which covers both mental and physical well-being. In 2012, various personnel events were organized to improve physical well-being.

VACON PLC | ANNUAL REPORT 2012

BOARD OF DIRECTORS' REPORT JANUARY 1-DECEMBER 31, 2012

Environment

Vacon's environmental responsibility is based on products, solutions, and applications which help save energy and reduce greenhouse emissions, particularly carbon dioxide emissions. The company's products are used extensively in different industries to improve energy-efficiency, utilize new sources of energy, and reduce greenhouse gas emissions.

Vacon knows its environmental responsibility and develops increasingly sustainable energy solutions for customers, improves the eco-friendliness of the product life cycle and continuously seeks more ecological operating methods. In 2012, the company successfully continued the environmental responsibility projects launched in the previous year. The development projects were related to the company's products, processes, and the improvement of environmental management systems.

Environmental management is part of operations and quality management systems. Vacon has invested in the development and harmonization of the quality systems between different operating countries.

Vacon's plants and operating methods are characterized by energy-efficiency and eco-friendliness. Vacon's plants in China and Italy operate in energy-efficient facilities completed in 2011. The plant in Italy meets the B level requirement of the KlimaHaus certification, which means that its energy consumption is $< 50\mathrm{kWh} / \mathrm{m}^2$

Vacon's plant in the USA was again awarded the LEED Gold (Leadership in Energy and Environmental Design) certificate, which has been awarded to the plant since 2009.

In Finland, the Vaasa plant implemented measures in 2012 related to the voluntary energy-efficiency agreement of Finland's Ministry of Employment and the Economy signed by Vacon in 2010. The company is striving for $20\%$ energy savings at its Vaasa plant operations by 2016. Lighting and solutions for generating savings in heating were modernized and the energy consumption of the testing system was streamlined at the Vaasa plant in 2012. The Vaasa plant also has a solar energy unit, installed on the roof in 2011. The unit's peak power is $55\mathrm{kW}$, and it helps reduce the amount of purchased electricity. The Annual Report published by Vacon contains a corporate responsibility section, which includes a section on the environment.

COMPANY OWNERSHIP AND CORPORATE GOVERNANCE

Shares and shareholders

In April 2012, the parent company paid dividends of EUR 13.7 million, or EUR 0.90 per share, in accordance with the Annual General Meeting held on March 27, 2012. This equals $81\%$ of the earnings per share in the 2011 financial year.

Vacon's market value stood at EUR 611.5 million at the end of December (EUR 471.5 million). The closing share price on December 31, 2012 was EUR 40.20. The lowest share price during the January-December period was EUR 31.11 and the highest EUR 42.54.

A total of 3,150,916 Vacon shares (20.7% of the share stock) were traded on the stock exchange in 2012, or in monetary terms, worth EUR 119.4 million. According to the shareholder register dated on December 31, 2012, Vacon had 4,665 registered shareholders. The number of nominee registered shares and those registered by foreigners totaled 51.2% (53.0%) of the shares.

On November 1, 2012, Vacon Plc received a notification under Section 9 of Chapter 2 of the Securities Markets Act, stating that the holding of AC Invest Three B.V. (business ID 51490994), a subsidiary of Ahlström Capital Oy (business ID 1670034-3), in Vacon Plc shares had fallen below the 3/20 (15%) threshold. According to the notification, AC Invest Three B.V. owns 2,064,844 Vacon Plc shares, which corresponds to 13.5% of the shares and voting rights in Vacon Plc. The number of shares fell below the aforementioned threshold in share trading on 1 November 2012. On November 19, 2012, Vacon Plc received a notification under Section 9 of Chapter 2 of the Securities Markets Act, stating that the holding of Ameriprise Financial, Inc. and companies belonging to it in Vacon Plc share capital and voting rights had exceeded 5%. According to the notification, the combined direct and indirect shareholding of Ameriprise Financial, Inc. and its companies is now 772,623 Vacon Plc shares, which corresponds to 5.1% of the shares and voting rights in Vacon Plc. The number of shares exceeded the aforementioned threshold in share trading on November 16, 2012.

Own shares

On December 31, 2012 Vacon Plc held a total of 83,227 of its own shares, which it had acquired at an average price of EUR 34.74 a share. This is $0.5\%$ of the share capital and voting rights, so it has no major impact on the distribution of ownership or voting rights in the company.

On July 31, 2012 the Board of Directors of Vacon Plc took the decision to exercise the authorization to purchase the company's own shares given by the Annual General Meeting of Shareholders on March 27, 2012. The maximum number of shares to be purchased is 60,000, which corresponds to approximately $0.4\%$ of the shares and voting rights in Vacon Plc. The purchase of shares reduces the company's unrestricted equity. By the end of the year the company had acquired altogether 60,000 of its own shares at a cost of some EUR 2.3 million. The purchase of own shares ended on November 15, 2012.

Board of Directors and President and CEO

Until the Annual General Meeting held on March 27, 2012, the Board of Directors included Pekka Ahlqvist, Jari Eklund, Jan Inborr, Juha Kytölä, Panu Routila, Mika Vehviläinen, and Riitta

BOARD OF DIRECTORS' REPORT
FINANCIAL STATEMENTS

Viitala. At the AGM, Pekka Ahlqvist, Jari Eklund, Jan Inborr, Juha Kytölä, Panu Routila, Mika Vehviläinen, and Riitta Viitala were re-elected as Board members. Jan Inborr was re-elected Chairman and Mika Vehviläinen was elected Vice Chairman of the Board of Directors at the organization meeting of the Board of Directors. The term of office for Board members continues until the end of the following Annual General Meeting. Vacon's President and CEO throughout the financial year was Vesa Laisi and Heikki Hiltunen was Executive Vice President and deputy to the CEO. Vacon Plc's management is described in greater detail in the section covering the Group's governance and management system in the company's Annual Report. The information is also available on the company's website at www.vacon.com.

Auditors

In accordance with the decision of the Annual General Meeting, the company's auditor is authorized public accountants PricewaterhouseCoopers Oy (PwC) and the principal auditor appointed by PwC is Markku Katajisto, APA.

KEY EVENTS AFTER THE FINANCIAL PERIOD

Pia Aaltonen-Forsell, M. Soc.Sc. (born in 1974) was appointed Chief Financial Officer and member of the company's Executive Management Team on January 22, 2013. Pia Aaltonen-Forsell will join Vacon no later than May 1, 2013.

Pia Aaltonen-Forsell joins Vacon from Stora Enso where she has held several management positions in finance and control, including that of SVP, Group Controller. Most recently she has been SVP Finance, IT and M&A at the Building and Living Business Area and has been a member of its management team.

Vacon's previous CFO Eriikka Söderström resigned from the company to join KONE Corporation. Söderström continued with the company until February 5, 2013.

BUSINESS STRATEGY

The core of Vacon's business strategy has remained unchanged. It is supported by four strategic priorities: product leadership, 100% focus on AC drives, a multi-channel sales network, and a global presence.

For Vacon, product leadership means an extensive and competitive product portfolio and excellent product and application competence among its personnel. In 2012, Vacon introduced several new AC drives to the market. One of the new products released in 2012 was the VACON® 100, which will play a significant role in Vacon's long-term growth. At the same time, the company has developed its competence so that its technology and product range can be utilized more extensively in different industries and applications. In 2012, Vacon also strongly developed its maintenance service products with its global sales network.

Multi-channel sales are at the core of Vacon's sales and marketing strategy. The company sells its products to original equipment manufacturers (OEMs), system integrators, brand label customers, distributors, and end-customers. Using several different distribution channels in each geographical area and industry is a genuine competitive advantage, which offers benefits to Vacon. The agility offered by multi-channel sales in its operations helps Vacon succeed in a rapidly changing market environment.

At the beginning of 2012, Vacon carried out an extensive reorganization with the central objective of bringing its operations close to customers. In the new model for the division of responsibilities, Vacon's operations have been divided into three main areas: Market Operations, Product Operations, and Support Functions. Market Operations contains sales, marketing, product marketing as well as customer and maintenance services. Product Operations contains R&D and product management as well as production, material sourcing, logistics, and product support. Support Functions contains HR, finance, funding and legal matters, ICT, and communication and investor relations. Through this reorganization, Vacon established, among other things, a new regional sales center in Singapore. In the coming years, the company will also establish new sales companies in order to accelerate sales in selected market areas.

RISK MANAGEMENT

Vacon Group's risk management is part of the management process for the company's business operations. Risk management aims to ensure that the risks relating to business operations have been thoroughly surveyed and are effectively controlled. The goal is to minimize any damage arising from the risks and to identify the risks in managing the business. Risk management activities aim to ensure profitable growth for the company. More information about key risks and risk management at Vacon are provided in the notes to the financial statements and the risk management section in the Annual Report as well as the account of the Group's governance and management.

NEAR-TERM RISKS AND UNCERTAINTIES

There are still uncertainties relating to developments in the global economy, and these may weaken demand for AC drives globally or in certain regions.

The parent company has tax proceedings in progress relating to a tax inspection of its transfer pricing in 2007-2008. Depending on the outcome of the tax proceedings, the decision may also affect taxation after 2008. The tax authority has given up its demands in relation to 2006.

VACON PLC | ANNUAL REPORT 2012

BOARD OF DIRECTORS' REPORT JANUARY 1-DECEMBER 31, 2012

The court proceedings relating to the customs procedures followed by Vacon's subsidiary in China continue in the higher court, since two of the parties appealed against the ruling given by the lower court in December 2011. It is possible that the sentence imposed on Vacon may also change in the higher court, so some uncertainty still remains in this matter. Vacon made provisions in 2010 and 2011 relating to the court proceedings.

COMMON RISKS AND UNCERTAINTIES AFFECTING THE COMPANY'S BUSINESS

In 2012, a Business Impact Analysis (BIA) at Vacon's plants in Vaasa and China and a comprehensive risk assessment at the Group level were carried out in cooperation with an external specialist.

Typical and common risks to which Vacon's business operations are exposed relate to uncertainty in demand and intensifying competition on price, to losing customers, credit losses, goodwill, the availability of raw materials and components, and to fluctuations in the values of foreign currencies.

Price changes, availability, and the quality of raw materials and components may affect the company's profitability and scope of operations. Product modifications can also cause an inventory risk with components. Purchase agreements for raw materials and components are mainly annual agreements that contain price and exchange rate clauses for changes in the global market prices for raw materials and other materials.

Vacon's order book has always been short term in nature, so there are no major risks connected with the timing of deliveries or their cancellation.

Worldwide, Vacon has thousands of customers. The share of the ten largest customers in Vacon's revenues was approximately 40% in 2012. The company continuously evaluates its customers' creditworthiness and ability to fulfill their commitments.

Vacon is capable of adapting its production capacity to market demand. The company estimates that its financial assets and withdrawable credit commitments are at a sufficient level for safeguarding liquidity.

Vacon's statement of financial position includes EUR 9.2 million of goodwill, which is mainly attributable to the business acquisition completed at the beginning of 2008. Goodwill is tested annually in order to detect possible impairment.

Some of the most significant financial risks affecting the result are foreign exchange risks. Exchange rate fluctuations may impact the business operations, although internationalizing operations reduce the relative importance of individual currencies. The most significant currency risks proportionate to the euro are associated with the US dollar and the Chinese renminbi. The Group applies hedge accounting, in accordance with IAS 39, to hedge the operations currency position in its USD cash flow.

DIVIDEND POLICY

PROSPECTS FOR 2013

Vacon estimates that the global AC drive market will grow considerably faster than average growth in industrial production, by an estimated 5-10% in 2013. Investments to improve energy efficiency and economic growth in developing countries will support growth in demand for AC drives.

Vacon is well placed to improve its profitability in 2013. Key factors in improving profitability are the cost benefit from transferring material sourcing to low-cost countries and the development of overall efficiency in operations.

MARKET GUIDELINES FOR 2013

Vacon estimates that its revenues will grow by 5-15% and that its operating profit percentage excluding one-time items will be 10-12% in 2013.

Revenues in 2012 totaled EUR 388.4 million and the operating profit percentage excluding one-time items was 9.3%.

Vacon's goal is to achieve revenues of EUR 500 million in 2014. Its profitability target for 2014 is an operating profit of 14%, and for return on equity the target is more than 30%.

BOARD PROPOSAL FOR DISTRIBUTION OF PROFIT

At the end of the financial year the distributable equity of the parent company stands at EUR 69.7 million. The Board of Directors proposes to the Annual General Meeting of Shareholders to be held on 26 March 2013 that a dividend of EUR 1.10 per share be paid from the parent company's profit for the 2012 financial year of EUR 20.5 million and the remainder of the profit for the year be transferred to retained earnings. According to this proposal, a total of EUR 16.7 million would be paid in dividend.

CONSOLIDATED FINANCIAL STATEMENTS

VACON PLC | ANNUAL REPORT 2012

KEY FIGURES

	IFRS	IFRS	IFRS	IFRS	IFRS
	2012	2011	2010	2009	2008
Per share data
Earnings per share, EUR	1.70	1.10	1.22	1.01	1.51
Equity per share, EUR	7.00	6.28	5.90	5.25	4.88
Dividend per share, EUR *]	1.10	0.90	1.00	0.70	0.65
Dividend payout ratio, % *]	64.68	81.47	82.13	69.02	42.94
Effective dividend yield, % *]	2.7	2.9	2.6	2.6	3.5
Price/earnings ratio	23.6	28.0	32.0	26.3	12.1
Share price development
Lowest during the year, EUR	31.11	27.21	24.90	15.30	17.00
Highest during the year, EUR	42.54	48.73	39.75	28.90	32.44
Closing price at end of year, EUR	40.20	30.90	39.00	26.70	18.30
Average price for the year, EUR	38.36	38.50	32.49	21.51	26.65
Market capitalization, MEUR	611.5	471.5	593.4	406.1	278.0
Trading volume, share	3,150,916	2,975,467	2,670,146	4,493,871	4,915,722
Trading volume, %	20.7	19.5	17.6	29.6	32.3
Adjusted average number of shares during the financial year **]	15,254,256	15,246,387	15,213,083	15,204,263	15,238,236
Number of shares at end of year **]	15,211,773	15,259,992	15,214,435	15,209,989	15,193,188
Own shares	83,227	35,008	80,565	85,011	101,812

*) The 2012 dividend is as proposed by the Board of Directors to the Annual General Meeting.

	IFRS	IFRS	IFRS	IFRS	IFRS
	2012	2011	2010	2009	2008
Group's financial ratios
Revenues, MEUR	388.4	380.9	338.0	272.0	293.2
Change in revenues, %	2.0	12.7	24.3	-7.2	26.3
Operating profit, MEUR	37.7	24.7	28.6	22.5	34.6
Change in operating profit, %	52.3	-13.4	26.8	-35.0	18.5
Operating profit as % of revenues	9.7	6.5	8.5	8.3	11.8
Profit before taxes	36.8	27.0	27.5	22.0	32.6
Profit before tax, % of revenues	9.5	7.1	8.1	8.1	11.1
Return on equity, %	25.8	18.7	22.1	20.5	34.3
Return on investments, %	33.2	26.9	27.0	23.1	37.0
Interest-bearing net liabilities, MEUR	-10.3	12.4	9.8	1.6	12.3
Gearing, %	-9.5	12.7	10.7	2.0	16.3
Working capital, MEUR	33.0	45.1	45.9	31.2	42.5
Equity ratio, %	53.1	50.0	46.0	56.5	51.1
Gross capital expenditure, MEUR	13.8	18.7	15.9	18.2	11.2
Gross capital expenditure as % of revenues	3.6	4.9	4.7	6.7	3.8
R&D costs, MEUR	25.1	25.1	20.8	17.6	17.0
R&D costs as % of revenues	6.5	6.6	6.2	6.5	5.8
Personnel at the end of the period	1,513	1,468	1,339	1,228	1,197
Order book, MEUR	50.0	36.6	52.1	32.0	48.0

**) The average number of shares in the financial period was 15,254,256. The number of shares outstanding is 15,211,773.

CALCULATION OF KEY FIGURES
FINANCIAL STATEMENTS

Earnings per share = $\frac{\text{Profit for the financial year attributable to equity holders of the parent company}}{\text{Adjusted average number of shares}}$

Equity per share = $\frac{\text{Total equity - share of non-controlling interests}}{\text{Adjusted number of shares at the end of the year}}$

Dividend per share = $\frac{\text{Dividend for the financial year}}{\text{Adjusted number of shares at the end of the year}}$

Dividend payout ratio, % = $\frac{\text{Dividend for the financial year} \times 100}{\text{Profit for the financial year attributable to equity holders of the parent company}}$

Effective dividend yield, % = $\frac{\text{Dividend per share} \times 100}{\text{Adjusted closing share price at end of year}}$

Price/earnings ratio = $\frac{\text{Adjusted closing share price at end of year}}{\text{Earnings per share}}$

Return on equity, % = $\frac{\text{Profit for the period} \times 100}{\text{Total equity, average of the beginning and end of the year}}$

Return on investments, % = $\frac{[\text{Profit before taxes} + \text{interest and other financial expenses}] \times 100}{\text{Total equity and liabilities} - \text{non-interest-bearing liabilities, average of the beginning and end of the year}}$

Equity ratio, % = $\frac{\text{Total equity} \times 100}{\text{Total equity and liabilities} - \text{advances received}}$

Gearing, % = $\frac{[\text{Interest-bearing liabilities} - \text{cash, bank balances, and financial assets}] \times 100}{\text{Total equity}}$

Working capital = Inventories + non-interest-bearing current receivables - non-interest-bearing current liabilities

R&D costs = R&D costs recorded in the income statement (including costs covered with subsidies) and capitalized development expenses

Market capitalization = $\frac{\text{Number of shares outstanding at end of year} \times \text{closing share price}}{\text{Number of shares traded during the year} \times 100}$

Trading volume, % = $\frac{\text{Number of shares traded during the year} \times 100}{\text{Adjusted average number of shares}}$

VACON PLC | ANNUAL REPORT 2012

CONSOLIDATED STATEMENT OF INCOME (IFRS)

EUR thousand	Note	Jan 1-Dec 31,2012	%	Jan 1-Dec 31, 2011	%
Revenues	3	388,368	100.0	380,883	100.0
Other operating income	4	229		337
Change in inventories of finished goods and work in progress		-1,929		-2,209
Materials and services	5	-201,459		-202,820
Employee benefit related expenses	7	-77,049		-68,790
Depreciation/amortization	8	-13,708		-12,221
Other operating expenses	6	-56,756		-70,436
Operating profit		37,697	9.7	24,744	6.5
Financial income	11	4,752		8,319
Financial expenses	11	-5,649		-6,109
Profit before taxes		36,800	9.5	26,953	7.1
Income taxes	12	-10,185		-9,297
Profit for the period		26,614	6.9	17,655	4.6
Attributable to:
Equity holders of the parent company	13	25,944		16,843
Non-controlling interests		670		813
Earnings per share calculated on profit belonging to the equity holders of the parent company:	13
Basic earnings per share, EUR		1.70		1.10
Diluted earnings per share, EUR		1.70		1.10
Consolidated statement of comprehensive income (IFRS)
EUR thousand
Profit for the period		26,614		17,655
Other items in the statement of comprehensive income:
Cash flow hedging		0		-53
Available-for-sale financial assets		0		2,492
Translation difference		117		991
Comprehensive result for the financial period, total		26,731		21,086
Attributable to:
Equity holders of the parent company		26,061		20,273
Non-controlling interests		670		813

CONSOLIDATED STATEMENT OF FINANCIAL POSITION (IFRS)
FINANCIAL STATEMENTS

Assets, EUR thousand	Note	Dec 31, 2012	%	Dec 31, 2011	%
Non-current assets
Goodwill	14	9,153		9,234
Development costs	14	18,654		17,438
Other intangible assets	14	6,838		9,257
Property, plant and equipment	15	24,397		25,073
Available-for-sale financial assets	18	3,692		3,692
Deferred tax assets	12	7,173		5,731
Other financial assets	18	3,233		2,320
		73,141	35.4	72,745	36.7
Current assets
Inventories	19	25,741		28,186
Trade and other receivables	20	76,910		80,871
Cash and cash equivalents	21	31,074		16,305
		133,725	64.6	125,362	63.3
Total assets		206,866	100.0	198,107	100.0
Total equity and liabilities, EUR thousand	Note	Dec 31, 2012	%	Dec 31, 2011	%
---	---	---	---	---	---
Equity attributable to equity holders of the parent company
Share capital	22	3,059		3,059
Share premium		4,966		4,966
Other reserves		75		73
Own shares		-4,972		-2,646
Fair value reserve		2,348		2,348
Retained earnings		101,067		87,981
		106,544	51.5	95,781	48.3
Non-controlling interests		2,002	1.0	1,931	1.0
Total equity		108,546	52.5	97,713	49.3
Non-current liabilities
Deferred tax liabilities	12	6,007		5,999
Employee benefits	24	1,937		1,657
Interest-bearing liabilities	25	17,855		20,221
		25,799	12.5	27,877	14.1
Current liabilities
Trade and other payables	26	54,740		53,067
Income tax liabilities		3,785		1,650
Provisions	27	11,107		9,278
Interest-bearing liabilities	25	2,888		8,522
		72,521	35.1	72,518	36.6
Total liabilities		98,320	47.5	100,394	50.7
Total equity and liabilities		206,866	100.0	198,107	100.0

VACON PLC | ANNUAL REPORT 2012

CONSOLIDATED STATEMENT OF CASH FLOWS (IFRS)

EUR thousand	Jan 1-Dec 31, 2012	Jan 1-Dec 31, 2011
Cash flow from operating activities
Profit for the period	26,614	17,655
Adjustments:
Depreciation/amortization	13,708	12,221
Financial income and expenses	897	-2,209
Taxes	10,185	9,297
Other adjustments	-1,424	12,286
Changes in working capital:
Change in inventories	2,015	4,969
Change in non-interest-bearing receivables	6,888	-2,920
Change in non-interest-bearing liabilities	4,298	-8,562
Interest received	293	907
Interest paid	-791	-1,224
Other financial items	-895	-1,297
Taxes paid	-9,483	-14,294
Net cash flow from operating activities	52,305	26,830
Cash flow from investing activities
Acquisition of subsidiary	-506	0
Investments in tangible and intangible assets	-11,827	-18,677
Other investments	-519	286
Repayments on loan receivables	0	1,984
Proceeds from the divestiture of other investments	0	2,599
Dividends received	0	694
Net cash flow investing activities	-12,852	-13,114
Cash flows from financing activities
Proceeds from long-term borrowings	507	20,221
Repayments on long-term loans	0	-10,676
Proceeds from short-term borrowings	13,000	27,710
Repayments on short-term loans	-20,978	-37,796
Purchase of own shares	-2,326	0
Dividends paid	-14,627	-15,685
Net cash flow from financing activities	-24,425	-16,226
Change in cash and cash equivalents	15,028	-2,510
Cash and cash equivalent at start of year	16,305	18,392
Translation differences in cash and cash equivalents	-260	423
Cash and cash equivalent at end of year	31,074	16,305

CONSOLIDATED STATEMENT OF FINANCIAL POSITION (IFRS)
FINANCIAL STATEMENTS

EUR thousand	Share capital	Share premium	Other reserves	Own shares	Revaluation reserve	Retained earnings	Total	Non-controlling interests	Total equity
Equity on Jan 1, 2011	3,059	4,966	63	-2,646	-91	84,358	89,710	1,551	91,261
Other adjustments			10			87	97	17	114
Profit for the period						16,843	16,843	813	17,655
Other items in the statement of comprehensive income:
Cash flow hedging					-53		-53		-53
Available-for-sale financial assets					2,492		2,492		2,492
Translation difference						991	991		991
Comprehensive result for the financial period, total					2,439	17,834	20,273	813	21,086
Share bonuses						916	916		916
Dividends paid						-15,214	-15,214	-450	-15,665
Equity on Dec 31, 2011	3,059	4,966	73	-2,646	2,348	87,981	95,781	1,931	97,713
Equity on Jan 1, 2012	3,059	4,966	73	-2,646	2,348	87,981	95,781	1,931	97,713
Other adjustments			3			-174	-171	36	-135
Profit for the period						25,944	25,944	670	26,614
Other items in the statement of comprehensive income:
Translation difference						117	117		117
Comprehensive result for the financial period, total						26,061	26,061	670	26,731
Share bonuses						1,242	1,242		1,242
Dividends paid						-13,734	-13,734	-606	-14,340
Purchase of own shares				-2,326			-2,326		-2,326
Acquisition of non-controlling interests						-309	-309	-30	-338
Equity on Dec 31, 2012	3,059	4,966	75	-4,972	2,348	101,067	106,544	2,002	108,546

VACON PLC | ANNUAL REPORT 2012

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1. GENERAL INFORMATION

The Vacon Group is a global company providing a comprehensive set of AC drives and related services. Vacon Plc and its subsidiaries focus exclusively on AC drives. The Group has operations in 29 [27] countries.

Vacon Plc is a Finnish public limited company that has been established in accordance with the laws of Finland. The company's registered office is in Vaasa, and its registered address is Runsorintie 7, 65380 Vaasa, Finland. Copies of the consolidated financial statements are available at www.vacon.com or from Vacon Plc's headquarters.

Vacon Plc's Board of Directors approved these financial statements for publication at its meeting on February 4, 2013. According to the Finnish Limited Liability Companies Act, the shareholders at the Annual General Meeting have the option to approve or reject the financial statements after they have been published. The Annual General Meeting may also decide on amending the financial statements.

2. ACCOUNTING PRINCIPLES FOR THE CONSOLIDATED FINANCIAL STATEMENTS

Accounting principles for financial statements

The consolidated financial statements have been prepared in accordance with the International Financial Reporting Standards (IFRS), applying the IAS and IFRS standards in force on December 31, 2012, as well as the SIC and IFRIC interpretations. International Financial Reporting Standards refer to the standards and their interpretation to be applied in the community as provided in the Finnish Accounting Act and the provisions issued on the basis of this act, and in regulation (EC) No 1606/2002 of the European Parliament and of the Council on the application of international accounting standards. Notes to the consolidated financial statements have also been prepared in accordance with Finnish legislation regarding accounting and corporations, complementing the IFRS standards.

Vacon adopted the IFRS standards on January 1, 2004, until which date reporting was conducted in accordance with the Finnish Accounting Standards (FAS). For the transition, Vacon applied the First-Time Adoption of the IFRS standard, which allowed certain transitional exceptions in the retrospective application of individual standards. The most significant exception applied was using the FAS-compliant financial statement carrying amounts as the consolidated goodwill carrying amounts in the IFRS transition statement of financial position.

Financial statement information is presented in thousands of euros and it is based on the original acquisition cost unless otherwise stated in the accounting principles below.

Estimates

When preparing the IFRS-compliant consolidated financial statements, the company's management is required to make estimates and assumptions. These affect the amount of assets, liabilities, income, and expenses to be recorded. In addition, judgment is needed in the application of the accounting principles for financial statements. The estimates and assumptions are based on historical experience and other justifiable assumptions that are believed to be reasonable under the circumstances that serve as the foundation for assessing the items entered in the financial statements. The final figures may differ from these estimates. The estimates concern the feasibility of realizing certain assets, the useful economic lives of tangible and intangible assets, the setting of provisions relating to the business operations, goodwill, deferred tax assets, and determination of contingent assets and liabilities. For goodwill, the anticipated income and interest rate used in testing for impairment contain estimates. The estimate of future taxable income creates a basis for presenting deferred tax assets.

Principles of consolidation

The consolidated financial statements include the parent company and all companies in which the parent company has the majority of votes or other controlling interest. The financial results of subsidiaries acquired or established during the year are consolidated from the date of acquisition or establishment. Consolidation ends when the controlling interest ceases. Subsidiaries have been included in the consolidated financial statements using the acquisition cost method. All payments to be made to complete an acquisition are recognized as an expense at the time of acquisition. The identifiable assets and liabilities of acquired companies are valued at fair value at the time of acquisition. The difference between the price paid for the company and its net assets valued at fair value constitutes goodwill. If the consideration is smaller than the fair value of the net assets of the acquired subsidiary, the difference is recognized through profit and loss. As allowed by IFRS 1, acquisitions made before the adoption of IFRS have not been adjusted to comply with IFRS principles; instead, they remain at the FAS compliant values at the time of adoption.

Transactions completed with non-controlling interests which do not result in a loss of the controlling interest are handled as transactions concerning equity. When the Group's controlling interest ceases, the remaining holding is measured at the fair value on the date the controlling interest was lost and the change in the carrying amount is recognized through profit and loss.

Intra-group business transactions, receivables, liabilities, non-realized margins, and intra-group profit distribution are eliminated in the consolidated financial statements. The subsidiaries' accounting principles have been adjusted to match the accounting principles applied by the Group, if needed. The allocation of profit or loss from the financial period to the shareholders of the parent company and the non-controlling interests is presented in the income statement. The allocation of the comprehensive income to the shareholders of the parent company and the non-controlling interests is presented in the statement of comprehensive income. The share of the non-controlling interests is presented as an individual item under equity. In the consolidated financial statements, the changes in Group companies' depreciation difference have been divided into change in deferred taxes and profit for the period. In the consolidated statement of financial position, the accumulated amortization difference has been divided into deferred taxes and non-restricted equity.

Foreign currency items

The figures concerning the financial performance and position of the Group's business units are measured in the currency in the main business environment of each unit ("business currency"). The consolidated financial statements are presented in the euro (thousand), which is the business and presentation currency of the Group's parent company.

Separate companies' transactions carried out in foreign currencies are recognized in the business currency at the exchange rate of the transaction date. At the end of the financial year, monetary items denominated in foreign currencies are valued at the exchange rate of the closing date. Translation differences from business transactions are presented in the sales and purchases translation differences. Translation differences from interest-bearing liabilities and receivables are presented in their net amounts in financial income and expenses.

The income statements of Group companies whose business currency or financial statement currency is not the euro are translated into euros using the average rate for the financial year, and statement of financial positions using the rate on the closing date. Translation differences arising from the different exchange rates used in the income statement and statement of financial position have been recognized in the other items in the statement of comprehensive income. Translation differences

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FINANCIAL STATEMENTS

arising from applying the acquisition cost method and the resulting currency exchange rates have also been recognized in other items in the statement of comprehensive income. Translation differences generated before January 1, 2004, which is when the Group adopted the IFRS standards, have been recognized, in accordance with the exemption allowed by the IFRS 1 standard, in retained earnings at the adoption of the IFRS standards, and they will not be recognized through profit and loss later when the subsidiary is sold.

The cash flows of foreign subsidiaries have been translated into euros at the average exchange rate of the financial year.

Financial assets and liabilities

Financial assets

The Group's financial assets are classified according to the IAS 39 Financial Instruments: Recognition and Measurement standard into the following categories: financial assets at fair value through profit and loss, loans and other receivables, and available-for-sale financial assets. Financial assets are classified according to their purpose when acquired and at the time of their acquisition. Purchases and sales of financial assets are recognized on the transaction date.

An item in financial assets is classified in the category 'financial assets at fair value through profit and loss' if it has been acquired for trading purposes or if it is classified as recognized at fair value through profit and loss when originally booked. Derivatives that do not fulfill the conditions for hedge accounting as stated in IAS 39 are presented in this category.

'Loans and other receivables' are assets other than derivative assets that involve fixed or definable payments, are not quoted on the active markets, and that the Group does not hold for trading purposes. They are valued at amortized acquisition cost. On statement of financial position, they are included in short-term or non-current assets according to their nature. Loans and other assets are presented as non-current assets if they mature in over 12 months. 'Trade and other receivables' as well as 'cash and cash equivalents' on the statement of financial position are also categorized as loans and other receivables.

Available-for-sale financial assets are assets other than derivative assets that have been specifically allocated to this category or have not been classified in any other category. They are included under non-current assets. Available-for-sale financial assets comprise shares and holdings in investment funds. They are valued at fair value if the fair value can be reliably determined. Changes in the fair value of available-for-sale financial assets are recognized in the other items in the comprehensive

income and presented in the equity item. The fair value reserve contains the changes in fair value and their tax impact. The accumulated changes in the fair value are moved from equity as adjustments due to the changes caused by classification through profit and loss when the investment is sold or when its value has impaired so that an impairment loss must be recognized for the investment.

Cash and cash equivalents

Cash and cash equivalents comprise cash and bank deposits. The credit limit for the Group's cash pooling is included under current interest-bearing liabilities, if the net limit is in use.

Financial liabilities

Financial liabilities are initially measured in the accounts at fair value. Transaction costs are included in the original carrying amount of financial liabilities. Subsequently, all financial liabilities are measured using the effective interest rate method at amortized cost. Financial liabilities are included under current and non-current liabilities.

Derivative instruments and hedge accounting

Derivative contracts are originally booked at acquisition cost, which matches their fair value. In subsequent financial statements, derivative contracts are measured at fair value. Publicly quoted market prices and rates as well as generally used measurement models are used to define the fair value of derivatives. The information and assumptions used in the measurement models are based on verifiable market prices and values. The fair values of derivative contracts expiring within a year are shown in the statement of financial position under current receivables or liabilities, and contracts with longer maturity under non-current receivables or liabilities.

The Group applies IAS 39 compliant hedge accounting for cash flow hedging with respect to operative USD exposure. The relationship between the hedging instruments and items to be hedged is documented when hedging begins. The objectives of risk management and strategies to be followed in different hedging measures are also documented. When hedging begins and continuously thereafter, the Group documents whether the derivatives used in hedging effectively cancel the changes in the fair value or cash flows of the items to be hedged. The hedging instruments used are foreign exchange forwards and options. For those hedging relationships that meet the hedge accounting criteria, the effective portion of the change in the fair value of the hedging instrument is recognized in other items in the comprehensive income and any remaining ineffective portion is

recognized through profit and loss. The cumulative change in fair value, which is recognized in other items in the statement of comprehensive income, is recognized through profit and loss at the moment the anticipated cash flow is recognized in the income statement.

The Group does not apply hedge accounting to interest rate swaps, currency options and foreign currency denominated loans that hedge foreign currency denominated net investments in foreign business units. Changes in the fair value of hedging instruments are recognized in financial items in the income statement.

If the derivative instruments do not meet the criteria for hedge accounting specified in IAS 39, the change in the fair value of the derivative instrument is recognized simultaneously with the hedged cash flow if hedging proves ineffective. If the hedged transaction is no longer likely, the result of the derivative is immediately recognized through profit and loss.

Goodwill and other intangible assets

Goodwill generated from acquisitions consists of the difference between acquisition cost and identifiable acquired net assets valued at fair value. Goodwill has been allocated to cash generating units. Goodwill and intangible assets with an unlimited economic life, if there are any, are tested for impairment during the last quarter.

Goodwill is reviewed for impairment annually or more frequently if events or conditions indicate a possible impairment. The carrying amount is compared to the recoverable amount, which is the higher of the value in use or the fair value less costs incurred by sales. A unit's recoverable amount is determined from cash flow predictions discounted to their present value. In the calculations, the discount rate used is based on a capital structure in which the share of equity is 80% and the share of borrowings is 20%. The ROE requirement comprises the estimated risk-free interest in the euro zone (1.5%) and the anticipated inflation (2%), the general risk premium in the share market (4.5%), and the beta coefficient, which measures the level of risk in the operations (1.081). In addition, a risk premium (1%) has been added to the interest for Italy and Spain. For India, the country's risk-free interest (8.18%) has been used. The discount rate used in the calculations is defined before taxes. More information about the sensitivity of the recoverable amount in goodwill to changes in the assumptions applied is given in Note 14.

Other intangible assets include software licenses, computer programs, subscription fees, customer relationships and technology developed. They are valued at historical cost and are amortized on a straight-line basis over their expected useful lives.

VACON PLC | ANNUAL REPORT 2012
73

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

The depreciation periods for intangible assets are:

Software licenses, computer programs and membership fees...3-5 years
Customer relationships and technology developed...3-7 years

Any subsequent expenses associated with intangible assets are capitalized only if it is likely that the future financial benefit will flow to the company and if the acquisition cost can be reliably determined. Otherwise the costs are recognized as expenses as they are incurred.

R&D costs

R&D costs are recognized as expenses on an accrual basis as they are incurred. Development costs that meet the criteria specified in IAS 38 are capitalized in intangible assets and amortized over their economic life, but no later than in five years. Capitalized expenses include direct material costs, labor costs, and related overheads.

A product designed to replace an existing product remains at the research stage until it has been tested and found feasible in prototype testing and is therefore likely to become available for sale later. After that, it moves on to the development stage and the expenses are capitalized in the statement of financial position. The values of the capitalized goods are tested for impairment during the last quarter.

Expenses related to products developed for new product ranges are not capitalized since the future benefits of such products are difficult to estimate. The expenses for products developed for a specific customer are also not capitalized.

Property, plant and equipment

Machinery and equipment represent the largest component of property, plant and equipment. In the statement of financial position, these are measured at original acquisition cost less accumulated amortization. The acquisition cost includes expenses which are immediately incurred by the acquisition of tangible assets. Land areas are not depreciated.

Ordinary maintenance and repair costs are recognized as expenses as they are incurred. Significant modernization and improvement investments are capitalized and depreciated over the remaining economic life of the related main asset.

Property, plant and equipment are depreciated on a straight-line basis over their economic useful life.

The depreciation schedule for property, plant and equipment is as follows:

Buildings...5-10 years
Machinery and equipment...3-15 years
Other tangible assets...5-10 years

Gains or losses from the sale or disposal of property, plant and equipment are recognized through profit and loss and presented in other operating income or costs.

Impairment

The carrying amount of assets is assessed at the end of the financial year to identify potential impairment. If there are any indications of impairment, the recoverable amount of the asset is estimated to be the higher of the net sales price or the value in use. Impairment is recognized if the carrying amount exceeds the recoverable amount. The impairment loss is recognized immediately through profit and loss. For impairment assessment, the asset items are categorized at the lowest levels where cash flows can be separately itemized.

Leases

Leasing agreements where the Group has an essential part of the risks and benefits inherent in ownership are classified as finance leases. At the commencement of the lease, they are entered in the statement of financial position at an amount that equals the fair value of the leased property at the commencement of the lease or a lower present value of the minimum lease payments. The leasing fees are divided into financial expenses and loan repayment. Financial expenses are allocated to financial periods during the leasing period so that the interest rate for the remaining debt will be the same for each financial period. The corresponding leasing liabilities less financial expenses are included in interest-bearing liabilities. The interest rate portion of financing is recognized in the income statement during the leasing period. Property, plant and equipment acquired under finance leasing contracts are depreciated over the lesser of the useful life of the asset or duration of the lease period.

Leasing agreements that are not finance leases constitute operating leases. These fees will be recognized as expenses in equal installments over the leasing period.

Inventories

Inventories are entered in the statement of financial position at the acquisition cost or at the lower net realizable value using the FIFO method (first in, first out).

The component acquisition cost includes all purchasing costs, including direct transportation, handling, and other costs. The acquisition cost of finished goods and work in progress includes raw materials, direct salaries, and other direct expenses as well as the appropriate share of indirect production costs, excluding interest expenses. Net realizable value is the estimated sales price in ordinary activities less the costs associated with the sales of products.

Trade and other receivables

Trade and other receivables are recognized at original value. Uncertain receivables are assessed on the basis of the risk involved in individual items. Credit losses are recognized as expenses in the income statement, and in the statement of financial position the amount is deducted from the value of receivables.

Pension schemes

In the Group companies, pension schemes are arranged in different ways depending on the pension legislation and practices of the country in question. As a rule, the pension schemes are contribution plans. In addition, the pension schemes of some foreign subsidiaries are defined benefit plans.

Payments for contribution plans are recognized as expenses for the period to which they are allocated. The pension costs of defined benefit plans are recognized based on authorized actuarial calculations. The present value of defined benefit plans is determined using a method based on an anticipated benefit unit, and the assets covered by the scheme have been valued at fair value in the statement of financial position date. Actuarial gains and losses are recognized in the income statement during the average remaining years of employment of the personnel participating in the plan to the extent that it exceeds 10% of the present value of the defined benefit plan or the higher fair value of the assets covered by the plan. At the time of transition on January 1, 2004, all actuarial gains and losses were recognized under equity.

Bonus schemes

The liability and expense to be recognized in the bonus schemes are based on a formula that takes into consideration the profit after certain adjustments that belongs to the company's shareholders. A provision is recognized when the Group has a contract-based obligation or when an actual obligation has arisen based on an earlier practice.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FINANCIAL STATEMENTS

Principles of recognition

Sales are recognized in connection with the transfer of ownership-related risks and benefits to the buyer. Generally, the risks and benefits are transferred at delivery. Sales adjustment items include cash discounts as well as exchange rate profits and losses on sales. Return and costs of long-term projects are recognized as income and expenses based on the percentage-of-completion. The percentage-of-completion is measured from the share of the to-date costs of the estimated total costs of the project. Expenses related to an unrecognized project are recognized as unfinished long-term projects under inventories. If the expenses incurred and profits recognized are greater than the amount billed for the project, the difference is presented in item 'Trade and other receivables' in the statement of financial position. If the expenses incurred and profits recognized are smaller than the amount billed for the project, the difference is presented in item 'Trade and other payables'. If it is likely that the overall costs of the project will exceed the overall income, the expected losses are immediately recognized as expenses.

Operating profit

The concept of operating profit is not defined in IAS 1: Presentation of Financial Statements. The Group has defined it as follows: Operating profit is the net sum of revenues plus other operating income less purchase costs adjusted with the change in inventories of finished goods and work in progress and the expenses arising from production for own use, less employee benefit costs, depreciation, amortization, and any impairment losses, and other operating costs. All other income statement items except those mentioned above are shown beneath the operating profit. Exchange differences are included in the operating profit provided that they originate from items related to business operations; otherwise, they are recognized under financial items.

Government grants

Subsidies received from the government or other parties are recognized as income in the income statement, with matching expenses recognized. Subsidies are recognized as deductions of the corresponding expenses. Subsidies associated with tangible and intangible assets are deducted from the asset acquisition price and the net acquisition cost is capitalized in the statement of financial position.

Equity compensation benefits

The Group has two share bonus schemes. Share bonus scheme A offers key persons the opportunity to receive a bonus of company shares for three earnings periods of one calendar year each by achieving the targets set for them. The earnings periods are the calendar years 2011, 2012, and 2013. Share bonus scheme B offers the company management team an opportunity to receive the company's shares as a bonus. The scheme has one earnings period, which covers the calendar years 2011-2014.

The shares to be assigned are measured at the share price of the moment of assignment and recognized in the result as employee benefits and increase in equity. The portion to be paid in cash is measured at the share price of the moment of assignment (realized schemes) or at the price of the closing of accounts (schemes under way) and recognized in the result as employee benefits and liability. More detailed terms and conditions about the share bonus scheme are presented in greater detail in Note 23. Share-based payments.

Provisions

Items related to contracts and other effective obligations that are likely to require financial resources are recognized in the statement of financial position as provisions, if their amount can be reliably assessed. Currently, these only include warranty provisions and any negative contracts and outstanding reclamations. The anticipated future warranty costs of delivered products are recognized as warranty provisions. Realized warranty costs, with changes in warranty liability taken into account, are recognized in the income statement in the period during which they are incurred.

Income taxes and deferred taxes

Taxes in the consolidated income statement include the Group companies' taxes paid and accrued corresponding to the financial result for the period on the basis of taxable income calculated in accordance with each company's local tax regulations, adjustments to taxes from previous financial periods, and changes in deferred taxes.

The recognized deferred tax assets and liabilities include the temporary differences between the Group companies' taxes and the statement of financial position. To calculate deferred tax assets and liabilities, the tax rate used is the following year's tax rate approved for the country in question on the balance sheet date or a tax rate which has been in practice approved on the reporting period closing date. The most significant tax assets and liabilities consist of tax losses carried forward, appropriations, capitalizations of development costs, non-current asset items allocated at acquisition, provisions and financial instruments.

Deferred tax assets from tax losses carried forward are recognized in cases where it is likely that the loss can be used against the taxable income in future financial years. Deferred tax liabilities are recognized in full. The prerequisites for recognizing deferred tax liabilities are estimated on the closing date of each reporting period.

Contingent liabilities and contingent assets

A contingent liability is a potential obligation generated as a result of prior events, the existence of which is only confirmed when an uncertain event outside the Group's control is materialized. A contingent liability is also an existing obligation which is not likely to require the fulfillment of the payment obligation or the size of which cannot be reliably determined. A contingent liability is presented in the notes.

A contingent asset is a possible asset item generated as a result of prior events, the existence of which is only confirmed when one or more uncertain events not completely under the Group's control materialize or fail to materialize in the future. A contingent asset is presented in the notes to the financial statements if it is likely that the company will gain financial benefit from it.

Application of revised and amended standards and interpretations

IASB has released the following new or revised standards and interpretations which the Group has not applied yet. The Group will implement them from the effective date of each standard and interpretation. If the effective date is a date other than the first day of the financial period, the Group will implement them from the beginning of the financial period following the effective date:

Amendment to IAS 1 Presentation of Financial Statements (effective from financial periods starting on July 1, 2012, or thereafter). The most central amendment is the requirement to categorize other items in the comprehensive statement of income based on whether they will be potentially transferred to be recognized through profit and loss later if certain conditions are met. The amendment will affect the presentation of other items in the comprehensive statement of income.
Amendment to IAS 19 Employee Benefits (effective from financial periods starting on January 1, 2013, or thereafter). The amendments mean that all actuarial gains and losses must in the future be recognized immediately in other items in the comprehensive statement of income, in other words, the so-called corridor method will be discontinued and the financial cost is determined based on net transfer to reserves. Vacon applies this standard starting on January 1,

VACON PLC | ANNUAL REPORT 2012

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

The amendment will not have material impact on the consolidated financial statements.
Amendment to IFRS 7 Financial Instruments: Disclosures [effective from financial periods starting on January 1, 2013, or thereafter]. The amendment specifies the requirements on information provided in notes which concern the net financial instruments in the statement of financial position and general netting arrangements or equivalent agreements. Vacon applies this standard starting on January 1, 2013. The amendment will not have material impact on the consolidated financial statements. The standard amendment has not yet been approved for application in the EU.
IFRS 9 Financial Instruments and amendments thereto (IASB has postponed the effective date of the standard to financial periods starting on January 1, 2015, or thereafter [previously, January 1, 2013]). The new standard will be published in three stages and will replace the currently effective IAS 39 Financial Instruments: Recognition and Measurement. The first stage amendments concern the classification, recognition and valuation of financial assets and liabilities. The different valuation methods for financial assets have been preserved but they have been simplified. Financial assets are divided into two main categories, based on the valuation methods: those measured at amortized acquisition cost and those measured at fair value. The classification depends on the company's model of operation and on the characteristics of cash flows based on the agreement. In terms of financial liabilities, the majority of IAS 39 regulations have been included in the new standard unchanged. Due to the unfinished sections, the final impact of the standard on the consolidated financial statements can so far not be estimated. The standard has not yet been approved for application in the EU.
IFRS 10 Consolidated Financial Statements (effective from financial periods starting on January 1, 2013, or thereafter). In accordance with the existing principles, the standard defines controlling interest as the central factor in resolving whether a company should be included in the consolidated financial statements. In addition, the standard provides additional guidance regarding the definition of controlling interest in situations in which it is difficult to assess. The standard has not yet been approved for application in the EU.
IAS 27 (revised 2011) Separate Financial Statements (effective from financial periods starting on January 1, 2013, or

thereafter]. The revised standard includes the requirements for separate financial statements which remain after the sections concerning controlling interest have been included in the new IFRS 10 standard. The revised standard will not have material impact on the consolidated financial statements. The revised standard has not yet been approved for application in the EU.

Amendment to IAS 32 Financial Instruments: Presentation [effective from financial periods starting on January 1, 2014, or thereafter]. The amendment specifies the presentation of net amounts of financial assets and liabilities and adds to the application instructions concerning the topic. The revised standard will not have material impact on the consolidated financial statements. The standard amendment has not yet been approved for application in the EU.

3. SEGMENT INFORMATION

Vacon focuses on one product, the AC drive, which is also Vacon's only business segment. Figures for the segment are equal to the figures for the entire Group. Vacon's operations were organized in the following main areas in 2012: Market Operations, Product Operations and Support Functions. In order to ensure customer-orientation, the operations are controlled by sales channel: distributors, system integrators, end-customers, original equipment manufacturers (OEM), and brand label customers.

Geographical details

The Group operates in three geographic areas: EMEA (Europe, the Middle East, and Africa), the Americas (North and South America), and APAC (Asia Pacific). Revenues are presented by customers' locations and assets by location. The geographical distribution of 2011 revenues has been updated for the EMEA and APAC regions.

Non-current assets are presented without financial instruments, deferred tax assets, assets related to benefits arrangements following the end of employment, and rights arising from insurance contracts.

Geographical areas, revenues from external customers:

EUR thousand	2012	2011
EMEA	225,546	242,467
Americas	76,648	67,630
APAC	86,174	70,786
Total	388,368	380,883
2012, EUR thousand	Revenues from external customers	Non-current assets
Finland	23,312	32,750
Other countries	365,056	33,218
Total	388,368	65,968
2011, EUR thousand	Revenues from external customers	Non-current assets
---	---	---
Finland	65,529	33,341
Other countries	315,354	33,673
Total	380,883	67,014

By the end of the year, revenues recognized from long-term projects in progress totaled EUR 2.9 million and the operating profit was EUR 1.0 million in total. Prepayments received from long-term projects in progress were EUR 2.0 million at the end of 2012. Receivables generated by recognitions, less prepayments received, totaled EUR 0.9 million. In 2011, the Group did not have any long-term projects in progress.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FINANCIAL STATEMENTS

OTHER OPERATING INCOME

EUR thousand	2012	2011
Rental income	79	159
Insurance compensations	92	0
Government grants	23	49
Other	36	128
Total	229	337

MATERIALS AND SERVICES

EUR thousand	2012	2011
Materials and consumables
Purchases during the financial year	194,114	194,916
Change in inventories	729	1,388
External services	6,616	6,516
Total	201,459	202,820

OTHER OPERATING EXPENSES

EUR thousand	2012	2011
Delivery costs and commissions	7,710	10,259
Sales and marketing expenses	8,599	19,873
Rents	10,128	9,160
Administrative expenses	18,675	20,922
Other costs	11,643	10,222
Total	56,756	70,436

VACON PLC | ANNUAL REPORT 2012

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

EMPLOYEE BENEFIT RELATED EXPENSES

EUR thousand	2012	2011
Salaries	59,505	53,532
Share bonuses granted paid in shares	1,242	876
Share bonuses granted paid in cash	1,908	1,469
Pensions
Defined benefit plans	668	335
Contribution plans	8,741	7,901
Other personnel costs	4,985	4,678
Total	77,049	68,790
Office personnel	955	938
Factory personnel	513	532
Average number of personnel	1,468	1,470

Management employee benefits, salaries, and remuneration are presented in Note 31. Related party transactions. Share bonuses granted to the management are presented in Note 23. Share-based payments.

DEPRECIATION AND AMORTIZATION

EUR thousand	2012	2011
Depreciation by asset group
Intangible assets
Development costs	3,250	2,246
Intangible rights	3,415	4,036
Other intangible assets	641	499
Total	7,307	6,781
Property, plant and equipment
Buildings	33	7
Machinery and equipment	6,369	5,433
Total	6,402	5,440
Depreciation and amortization total	13,708	12,221

AUDITOR'S FEES

EUR thousand	2012	2011
Audit fees	134	130
Tax consulting	115	64
Other services	62	50
Total	311	244

R&D COSTS

The income statement includes research and development costs recognized as expenses of EUR 20.6 million in 2012 (EUR 18.1 million in 2011).

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FINANCIAL STATEMENTS

11. FINANCIAL INCOME AND EXPENSES

EUR thousand	2012	2011
Dividends received	0	694
Interest income from loans and other receivables	283	224
Exchange rate gains on loans and other receivables	4,270	4,755
Other financial income	199	2,646
Total	4,752	8,319
Interest expenses on financial loans valued at amortized acquisition cost	-702	-1,098
Exchange rate losses on loans and other receivables	-4,849	-4,815
Other financial expenses	-98	-197
Total	-5,649	-6,109
Financial income and expenses, total	-897	2,209

Items above the operating profit include exchange rate differences of EUR -1.1 million from hedge accounting derivative contracts and of EUR 0.4 million from trade receivables (in 2011, EUR 0.2 million from derivative contracts and EUR 0.4 million from trade receivables). In 2011, other financial income includes the EUR 2.6 million compensation for the dissolution of an acquisition, received from The Switch Engineering Oy's shares.

12. INCOME TAXES

EUR thousand	2012	2011
Taxes based on the taxable income for the financial year	-10,972	-9,274
Taxes on the previous year	-673	-168
Deferred taxes	1,460	144
Total	-10,185	-9,297

Taxes related to other items in the statement of comprehensive income

	2012
	Before taxes	Tax impact	After taxes
Translation difference	117		117
Total	117	0	117
	2011
---	---	---	---
	Before taxes	Tax impact	After taxes
Cash flow hedging	-76	23	-53
Available-for-sale financial assets	2,492		2,492
Translation difference	991		991
Total	3,407	23	3,430

Calculation of taxes

EUR thousand	2012	2011
Profit before taxes	36,800	26,953
Taxes calculated in accordance with domestic tax rate	9,016	7,008
Deferred tax income related to the change in the tax rate	-625	-163
Impact of foreign subsidiaries' differing tax rates	396	616
Tax-free income	-383	-816
Non-deductible expenses	353	2,176
Deferred tax assets carried forward from tax losses	582	406
Taxes on the previous year	673	168
Others	174	-97
Taxes in the income statement	10,185	9,297

Deferred tax assets and liabilities

EUR thousand	2012	2011
Net deferred tax liability is allocated in the statement of financial position as follows:
Deferred tax assets	7,173	5,731
Deferred tax liabilities	-6,007	-5,999
	1,166	-267
Gross change in deferred taxes recognized in statement of financial position:
Deferred taxes Jan 1	-267	-528
Items entered in income statement	1,460	144
Translation difference	-17	26
Items entered in equity	-9	90
Deferred taxes Dec 31	1,166	-267

VACON PLC | ANNUAL REPORT 2012

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Change in deferred tax assets and liabilities during financial year:

2012, EUR thousand	Jan 1	Items entered in in-come statement	Items entered in equity	Translation difference	Dec 31
Deferred tax assets:
Employee benefits	35	52			88
Provisions	937	461		-7	1,391
Tax losses carried forward	2,654	377		4	3,035
Internal margin from inventories	1,609	48			1,657
Other temporary differences	496	558	-47	-6	1,002
Total	5,731	1,497	-47	-9	7,173
Deferred tax liabilities:
Capitalized intangible assets	4,861	-173			4,688
Accumulated amortization difference	1,125	-115	-38	9	981
Other temporary differences	13	325			337
Total	5,999	37	-38	9	6,007
Deferred taxes, net	-267	1,460	-9	-17	1,166

2011, EUR thousand

Deferred tax assets:
Employee benefits	42	-6			35
Provisions	688	250			937
Tax losses carried forward	2,325	337		-8	2,654
Internal margin from inventories	1,533	76			1,609
Other temporary differences	229	184	47	36	496
Total	4,817	840	47	28	5,731
Deferred tax liabilities:
Capitalized intangible assets	4,002	859			4,861
Accumulated amortization difference	1,365	-175	-67	2	1,125
Other temporary differences	-23	12	24		13
Total	5,344	696	-43	2	5,999
Deferred taxes, net	-528	144	90	26	-267

On December 31, 2012, the Group had EUR 1.9 million (EUR 1.4 million on December 31, 2011) of tax losses carried forward for which no deferred tax assets have been recognized since there is uncertainty associated with their realization. The losses in question will expire in 2015-2030.

13. EARNINGS PER SHARE

Basic earnings per share are calculated by dividing the profit for the financial period attributable to the equity holders of the parent company by the weighted average number of shares outstanding during the year. At the end of financial years 2011 and 2012, the Group had no diluting instruments.

EUR thousand	2012	2011
Profit for the financial year attributable to equity holders of the parent company	25,944	16,843
Weighted average number of shares during the year	15,254,256	15,246,387
Basic earnings per share, EUR	1.70	1.10
Diluted earnings per share, EUR	1.70	1.10

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FINANCIAL STATEMENTS

14. INTANGIBLE ASSETS

EUR thousand	Goodwill	Development costs	Other intangible rights	Other intangible assets	Advance payments and construction in progress	Total 2012	Total 2011
Acquisition cost, Jan 1	9,234	27,980	25,055	4,995	0	67,264	57,266
Increases		4,473	1,012	608	3	6,095	8,634
Decreases			-4			-4	-63
Transfers between items			6	48		54	868
Translation differences	-81	-9	-88	-45		-223	560
Acquisition cost, Dec 31	9,153	32,442	25,982	5,607	3	73,187	67,264
Accumulated amortization, Jan 1	0	-10,542	-18,840	-1,954	0	-31,335	-24,386
Accumulated amortization on decreases and transfers			4			4	64
Amortization for the financial year		-3,250	-3,415	-641		-7,307	-6,781
Translation differences		2	76	18		96	-232
Accumulated amortization, Dec 31	0	-13,788	-22,176	-2,578	0	-38,543	-31,335
Carrying amount, Dec 31, 2012	9,153	18,654	3,806	3,029	3	34,644
Carrying amount, Dec 31, 2011	9,234	17,438	6,215	3,042	0		35,929

Capitalized development costs refer to such development costs that meet the criteria specified in the IAS 38 standard. Capitalized development costs of new products have been divided into product groups and their balance sheet value has been tested against the discounted cash flows of the product groups. The cash flows of product groups are based on management forecasts for 2012-2020. The recoverable amounts of the product groups exceed their corresponding balance sheet values.

Other intangible assets include software licenses, computer programs, subscription fees, customer relationships, and technology developed. Customer relationships and technology developed are included in the goodwill impairment testing.

Impairment testing of goodwill in cash-generating units

Goodwill is tested annually in accordance with IFRS. In Vacon Group, goodwill has been allocated to nine cash-generating units. Allocating and testing goodwill at the level of cash-generating units also helps to plan and monitor the Group's operations.

Impairment of goodwill is tested by comparing the recoverable amount of a cash-generating unit with its balance sheet value. A unit's recoverable amount is determined from cash flow predictions discounted to their present value. The cash flows in turn are based on the five-year forecasts drawn up by the unit's management. The forecasts take into account only the unit's organic growth. The basis used for calculating long-term growth is an annual growth of two percent, except for India where three percent is used due to a higher inflation rate than in Western countries.

The Group's goodwill is distributed among nine business units (the Netherlands, Spain, Italy, Sweden, Germany, the USA, and India). According to the annual impairment tests, the recoverable amounts of the cash generating units exceed their balance sheet values, so the impairment tests have not resulted in impairment losses being recognized.

Sensitivity analysis

Decline in forecasted operating profit

Management estimates of the future profitability of operations have a key impact on the results of impairment testing. The estimated growth in business operations and the operating profit margin affect profitability. The reduction in annual forecasted operating profit that would result in the recoverable amount of the subsidiaries corresponding to the carrying amount of net assets, varies from unit to unit between -15% and -63%.

Rise in discount rate

The discount rate used in calculations also has a major impact when determining the recoverable amount. Calculations show that depending on the unit, the subsidiaries can withstand a rise of 3-49 percentage points in the discount rate before taxes, before their recoverable amount corresponds to the carrying amount of net assets.

Goodwill has been allocated to the following cash-generating units:

EUR thousand	2012	2011
Subsidiaries	9,153	9,234

VACON PLC | ANNUAL REPORT 2012

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Main assumptions used in impairment testing:

	2012	2011
Growth in revenues on average (p.a., five-year forecasts)	6–29%	9–31%
Pretax discount rate	8.9–16.1%	9.2–16.9%
Long-term growth	2–3%	2–3%
Goodwill allocated, EUR thousand	9,153	9,234
Carrying value, EUR thousand	46,245	47,841
Result of impairment test (recoverable amount vs. carrying amount)	Exceeds	Exceeds

Changes in the company's markets, the global economy, and interest rates are reflected in the growth and profitability forecasts for the business units and in the related risk and requirements for returns. The assumptions made for the impairment tests are based on the management view of the development of the coming financial periods on the closing date. The forecasts and assumptions have been drawn up to carry out impairment tests. The forecasts and other assumptions are reviewed constantly and can change.

PROPERTY, PLANT AND EQUIPMENT

EUR thousand	Land and water areas	Buildings	Machinery and equipment	Advance payments and construction in progress	Other tangible assets	Total 2012	Total 2011
Acquisition cost, Jan 1	132	109	58,805	2,420	68	61,534	52,670
Increases		30	6,311	1,320		7,661	11,647
Decreases			-48	-1,775		-1,823	-3,031
Transfers between items			1,184	-1,232		-48	-868
Translation differences			-215	2		-213	1,116
Acquisition cost, Dec 31	132	139	66,036	736	68	67,111	61,534
Accumulated depreciation, Jan 1	0	-7	-36,454	0	0	-36,461	-32,010
Accumulated depreciation on decreases and transfers			45			45	1,427
Depreciation for the financial year		-33	-6,369			-6,402	-5,440
Translation differences			104			104	-438
Accumulated depreciation, Dec 31	0	-40	-42,673	0	0	-42,713	-36,461
Carrying amount, Dec 31, 2012	132	99	23,363	736	68	24,397
Carrying amount, Dec 31, 2011	132	102	22,351	2,420	68		25,073

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FINANCIAL STATEMENTS

BREAKDOWN OF FINANCIAL ASSETS AND LIABILITIES BY MEASUREMENT CATEGORY

2012, EUR thousand	Financial assets/liabilities recognized at fair value through profit and loss	Loans and other receivables	Available-for-sale financial assets	Financial liabilities valued at amortized acquisition cost	Carrying amounts of balance sheet items	Fair value	Note
Non-current financial assets
Other financial assets		1,449	5,478		6,926	6,926	18
Current financial assets
Trade and other receivables		72,639			72,639	72,639	20
Cash and cash equivalents		31,074			31,074	31,074	21
Carrying amount by measurement category	0	105,161	5,478	0	110,639	110,639
Non-current financial liabilities
Interest-bearing liabilities				17,855	17,855	17,855	25
Current financial liabilities
Interest-bearing liabilities				2,888	2,888	2,888	25
Trade and other payables				35,957	35,957	35,957	26
Carrying amount by measurement category	0	0	0	56,700	56,700	56,700
2011, EUR thousand
Non-current financial assets
Other financial assets		274	5,738		6,012	6,012	18
Current financial assets
Trade and other receivables		77,708			77,708	77,708	20
Derivative contracts in hedge accounting	255				255	255	20
Cash and cash equivalents		16,305			16,305	16,305	21
Carrying amount by measurement category	255	94,287	5,738	0	100,280	100,280
Non-current financial liabilities
Interest-bearing liabilities				20,221	20,221	20,221	25
Current financial liabilities
Interest-bearing liabilities				8,522	8,522	8,522	25
Derivative contracts in hedge accounting	946				946	946	26
Trade and other payables				36,465	36,465	36,465	26
Carrying amount by measurement category	946	0	0	65,209	66,155	66,155

The carrying amount of the financial receivables correspond to the maximum credit risk on the closing date.

VACON PLC | ANNUAL REPORT 2012
83

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FAIR VALUE HIERARCHY OF FINANCIAL ASSETS AND LIABILITIES VALUED AT FAIR VALUE

EUR thousand	Fair values at the end of the financial period
	Dec 31, 2012	Level 1	Level 2	Level 3
Financial assets recognized at fair value through profit and loss
Foreign exchange forwards and options	447		447
of which in cash flow hedge accounting	0		0
Available-for-sale financial assets
Share investments	5,478			5,478
Loans and other receivables
Convertible bond	994			994
Total	6,918	0	447	6,471
Liabilities valued at fair value
Foreign exchange forwards and options	31		31
of which in cash flow hedge accounting	0		0
Total	31	0	31	0
EUR thousand	Fair values at the end of the financial period
	Dec 31, 2011	Level 1	Level 2	Level 3
Financial assets recognized at fair value through profit and loss
Foreign exchange forwards	256		256
of which in cash flow hedge accounting	255		255
Available-for-sale financial assets
Share investments	5,738			5,738
Total	5,994	0	256	5,738
Liabilities valued at fair value
Interest rate swaps	64		64
Foreign exchange forwards	1,138		1,138
of which in cash flow hedge accounting	946		946
Total	1,202	0	1,202	0

Fair values at hierarchy level 1 are based on the quoted prices of completely identical asset items or liabilities in an active market.

The fair values of level 2 instruments are to a significant extent based on inputs other than quoted prices included in level 1; however, they are based on information that is observable for the asset item either directly or indirectly. The Group uses market value reports compiled by Nordea Bank, Danske Bank,

and Svenska Enskilda Bank in determining the fair value of these instruments.

The fair values of level 3 instruments are based on acquisition cost or inputs concerning the asset item which are not based on observable market information but to a significant extent on the management's estimates.

RECONCILIATION OF OTHER FINANCIAL ASSETS VALUED AT FAIR VALUE IN ACCORDANCE WITH LEVEL 3

EUR thousand	2012	2011
Available-for-sale financial assets
Investment funds:
At the beginning of period, Jan 1	1,650	1,848
Increases	44	34
Decreases	-300	-232
At the end of period, Dec 31	1,394	1,650
Other unquoted holdings:
At the beginning of period, Jan 1	4,088	1,596
Increases / value changes	0	2,492
Decreases	-5	0
At the end of period, Dec 31	4,084	4,088
Loan
Convertible bond:
At the beginning of period, Jan 1	0	0
Increases	994	0
At the end of period, Dec 31	994	0

Investment fund holdings in Power Fund I are measured at acquisition cost, since its fair value cannot be determined reliably.

Available-for-sale financial assets are investments in unquoted shares and a majority of these consist of The Switch Engineering Oy's shares that are measured at fair value.

The convertible bond is a capital loan in nature and granted to The Switch Engineering Oy. The bond matures on November 30, 2014, to the extent that it has not been exchanged to unquoted shares. The interest rate is 10%.

Other receivables
At the beginning of period, Jan 1	274	393
Increases / decreases	181	-119
At the end of period, Dec 31	455	274

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FINANCIAL STATEMENTS

INVENTORIES

EUR thousand	2012	2011
Materials and consumables	11,951	12,680
Long-term projects in progress	629	0
Finished goods	13,161	15,506
Total	25,741	28,186

Inventories have been written down by EUR 2.8 million to accommodate for non-marketable assets in 2012 (EUR 1.3 million in 2011). Non-marketability deductions primarily cover spare parts and replacement units.

TRADE AND OTHER RECEIVABLES

EUR thousand	2012	2011
Loans and other receivables
Trade receivables	68,290	72,139
Other loan receivables	108	268
Other receivables	4,241	5,301
Total	72,639	77,708
Financial assets recognized at fair value through profit and loss
Derivative contracts in hedge accounting	0	255
Total	0	255
Receivables from long-term projects	923	0
Accrued income and prepayments	3,348	2,908
Total	4,271	2,908

CASH AND CASH EQUIVALENTS

EUR thousand	2012	2011
Cash and cash equivalents	31,074	16,305
Total	31,074	16,305

NOTES RELATING TO SHAREHOLDERS' EQUITY

	Number of shares	Number of own shares	Share capital EUR	Own shares EUR	Share premium EUR	Total EUR
Jan 1, 2011	15,295,000	-80,565	3,059,000	-2,646,015	4,966,488	5,379,473
Shares issued as share bonuses Apr 20, 2011		45,557
Dec 31, 2011	15,295,000	-35,008	3,059,000	-2,646,015	4,966,488	5,379,473
Shares issued as share bonuses Apr 24, 2012		11,781
Purchase of own shares
Aug 8 to Nov 15, 2012		-60,000		-2,326,231		-2,326,231
Dec 31, 2012	15,295,000	-83,227	3,059,000	-4,972,246	4,966,488	3,053,242

Vacon's share capital is EUR 3,059,000, divided into 15,295,000 fully paid shares. Vacon has one share series. Each share confers one vote at the Annual General Meeting.

Under the authorization given at the Annual General Meeting on March 25, 2004, the company repurchased 95,260 of its own shares, and under the authorization given at the Annual General Meeting on March 26, 2008, it repurchased a total of 60,000 of its own shares, and under the authorization given at the Annual General Meeting on March 25, 2012, it repurchased a total of 60,000 of its own shares.

The number of shares issued as a share bonus were as follows: 13,688 on April 21, 2006; 18,760 on April 12, 2007; 19,500 on April 8, 2008; 1,500 on December 23, 2008; 15,801 on April 22, 2009; 1,000 on December 3, 2009; 4,446 on April 22, 2010; 45,557 on April 20, 2011, and 11,781 shares on April 24, 2012, after which the company holds 83,227 of its own shares.

The Board of Directors' valid authorizations are presented in the section Shares and shareholders on page 109.

VACON PLC | ANNUAL REPORT 2012
85

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

23. SHARE-BASED PAYMENTS

In March 2011, Vacon Plc's Board of Directors decided on a new share-based incentive scheme that targets certain individuals in the Group. The purpose of the new scheme is to align the objectives of the management and the target group in order to increase the company's value and to commit the individuals in the target group to the company and offer them a competitive bonus scheme that is based on long-term holding of the company's shares.

The new share-based incentive scheme (Scheme A) has three earnings periods: the calendar years 2011, 2012, and 2013. The company's Board of Directors will decide the target group, earnings criteria for the scheme, and the targets set for the criteria at the beginning of each earnings period. The possible bonus for the earnings period 2012 is based on Vacon Group's revenues, operating profit, and working capital turnover, and it is paid out as a combination of the company's shares and cash in 2013. The share-based bonus scheme also contains a fourth earnings period for the members of the Management Team (Scheme B). This four-year earnings period is based on the Group's long-term strategy and covers the calendar years 2011-2014. The possible bonus for the earnings period 2011-2014 is based on Vacon Group's long-term strategic revenues and operating profit targets, and will be paid out as a combination of the company's shares and cash in 2015. If the maximum targets set for the earnings criteria of the 2011-2014 earnings period are met earlier, the bonus for the earnings period 2011-2014 can correspondingly be paid out earlier. The monetary portion aims to cover taxes and similar payments that the bonus incurs for the recipient.

The shares issued in the earnings periods 2011, 2012, and 2013 must be held for the two-year commitment period after the end of the earnings period. If the employment relationship of the member of the target group ends during the commitment period, the shares received as a bonus must be returned to the company without consideration. Members of the Group's Management Team must hold half of the shares earned under the incentive scheme until the total value of the holding equals the value of the member's gross annual salary. This number of shares must be held until the employment relationship with the Group company ends.

The share-based bonus scheme has a target group of approximately 70 people. The net bonuses to be paid based on the

share-based bonus scheme for the four earnings periods total a maximum of 240,250 Vacon Plc's shares. In addition, an amount that is required for taxes and similar expenses on the shares when the shares are given will be paid in cash. The recipients of the share bonus are also entitled to any dividends accumulated during the earnings period.

The commitment period for one earnings period (2010) in the previous system, which the Board of Directors decided on in February 2008, was in effect in 2012. The conditions of this system are similar to those in the aforementioned Scheme A. The actual number of shares are given in the table below.

Nature of arrangement: Share bonus scheme

| Date of issue | 2011-2014/B
2012
Mar 22, 2011 | 2012-2014/A
2012
Mar 22, 2011 | 2011-2013/A
2012
Mar 22, 2011 | 2010-2012/A
2012
Feb 19, 2008 |
| --- | --- | --- | --- | --- |
| Implementation | Shares and cash | Shares and cash | Shares and cash | Shares and cash |
| Maximum number of shares offered as share bonus during the earning period, share | 41,500 | 59,250 | 59,500 | 47,700 |
| Share price at time of issue, EUR | 43.14 | 43.14 | 43.14 | 26.01 |
| Agreed earning period (no. of years) | 1 | 1 | 1 | 1 |
| Agreed period (years) for prohibition on transfer after the earning period | 2 | 2 | 1 | 0 |
| Share price on valuation date, EUR | 40.20 | 40.20 | 41.00 | 45.00 |
| Assumed participation | 91% | 91% | 100% | 100% |
| Realization of profit-based terms and conditions in the earning year | 65.0% | 56.3% | 19.8% | 95.5% |
| No. of shares issued under the scheme | 26,975 | 33,377 | 11,781 | 45,557 |
| Value of shares being issued on valuation date, EUR thousand | 1,084 | 1,342 | 483 | 2,050 |
| Portion to be paid in cash (for taxes) calculated with the value on closing date and assumed dividend, EUR thousand | 1,227 | 1,477 | 528 | 2,680 |
| Total cost of shares issued based on value at the time of issue, EUR thousand | 1,164 | 1,440 | 508 | 1,185 |
| Total cost of the share bonus scheme, EUR thousand | 2,390 | 2,917 | 1,036 | 3,865 |
| Share value adjusted with anticipated participation, EUR thousand | 1,059 | 1,310 | 508 | 1,185 |
| Consolidated income statement includes 1/3 of the sum in employee benefits and increase in equity, EUR thousand | 241 | 437 | 169 | 395 |
| Remaining amount to be recognized in future financial years after taking the anticipated participation into consideration, EUR thousand | 529 | 874 | 169 | 0 |
| Amount to be paid in cash adjusted with anticipated participation, EUR thousand | 1,129 | 1,356 | 528 | 2,680 |
| Consolidated income statement includes 1/3 of the sum in employee benefits and liabilities, EUR thousand | 325 | 542 | 206 | 835 |
| Remaining amount to be recognized in future financial years after taking the anticipated participation into consideration, EUR thousand | 565 | 814 | 173 | 0 |
| Costs from the share-based incentive scheme recognized during the period as employee benefits, EUR thousand | 566 | 979 | 376 | 1,230 |

The amount recognized as cost from the share bonus scheme during the financial year was based on real financial profit and the probability at which the conditions based on the result will be met. During the year, these conditions were met. The amount payable in cash changes until the handover of the shares, after which the allocations on remaining years will be final.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FINANCIAL STATEMENTS

24. EMPLOYEE BENEFITS

The Group has different pension arrangements to cover employee pension security in different countries. Pension security is based on each country's local legislation and standard practices. In Finland, pension security is largely provided in accordance with the Employees' Pensions Act (TyEL). In some countries, supplementary pensions increase the pension security.

EUR thousand	2012	2011
Reconciliation of employee benefit-related assets and liabilities
Current value of unfunded obligations	1,329	1,347
Current value of funded obligations	2,049	1,406
Fair value of assets	-1,230	-1,081
Non-recorded actuarial gains (+) or losses (-)	-343	-16
Net liabilities in the statement of financial position	1,806	1,657
Distributed as follows:
Employee benefit assets	-1,768	-1,097
Employee benefit liabilities	3,574	2,753
Net liabilities	1,806	1,657
Recognized in the statement of financial position:
Employee benefit assets in the assets of statement of financial position	-131	0
Employee benefit liabilities	1,937	1,657
Net liabilities in the statement of financial position	1,806	1,657
Defined benefit pension costs in the income statement are determined as follows:	2012	2011
---	---	---
Labor costs during the year	-240	-310
Interest expenses	-123	-108
Expected income from assets covered by the arrangements	14	83
Actuarial gains (-) and losses (+)	-319	0
Total	-668	-335
Changes in the current value of the liability are as follows:
Liability at start of year	2,753	2,559
Translation differences	-25	0
Current service cost	240	95
Interest expenses	123	108
Actuarial gains (-) and losses (+)	683	-9
Benefits paid	-200	0
Total	3,574	2,753
Changes in the fair values of scheme assets are as follows:
Fair value of scheme assets at start of year	-1,097	-956
Anticipated return	-14	-13
Actuarial gains (-) and losses (+)	-521	7
Payments by employer to scheme	-135	-135
Fair value of scheme assets at end of year	-1,768	-1,097

Scheme assets are invested in bonds.

Key actuarial assumptions	Dec 1, 2012	Dec 1, 2011
Discount rate, %	2.8–8.3	4.8–5.5
Expected return on assets, %	3.6–4.2	4.5
Assumed future pay raise, %	2.0–6.5	3.0–3.5
Assumed increase in pensions, %	0–7.0	0.25–2

The Group forecasts that it will pay EUR 0.4 million to defined benefit pension plans in 2013.

VACON PLC | ANNUAL REPORT 2012
87

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

25. INTEREST-BEARING LIABILITIES

Long-term liabilities measured at amortized acquisition cost
EUR thousand	2012	2011
Bank loans	17,855	20,221
Total	17,855	20,221
Current financial liabilities measured at amortized acquisition cost
EUR thousand	2012	2011
Repayment of bank loans in following year	2,873	4,959
Other loans	15	3,563
Total	2,888	8,522
Interest-bearing current liabilities by currency:
EUR thousand	2012	2011
Euro-denominated	2,888	3,619
CNY-denominated	0	4,903
Total	2,888	8,522

26. TRADE AND OTHER PAYABLES

EUR thousand	2012	2011
Financial liabilities valued at amortized acquisition cost
Trade payables	31,941	31,997
Other current liabilities	4,017	4,468
Total	35,957	36,465
Financial liabilities recognized at fair value through profit and loss
Derivative contracts in hedge accounting	0	946
Total	0	946
Advance payments received	2,478	2,732
Salary and personnel expenses	13,360	8,991
Other accrued expenses	2,944	3,933
Total	18,783	15,656

27. PROVISIONS

EUR thousand			2012
	Warranty provision	Other provisions	Total
Jan 1, 2012	5,549	3,729	9,278
Translation differences	-21	-18	-39
Increase in provisions	6,690	821	7,511
Used provisions	-5,549	-94	-5,643
Dec 31, 2012	6,669	4,438	11,107
EUR thousand			2011
---	---	---	---
	Warranty provision	Other provisions	Total
Jan 1, 2011	4,430	3,427	7,857
Increase in provisions	5,549	3,000	8,549
Used provisions	-4,430	-2,698	-7,128
Dec 31, 2011	5,549	3,729	9,278

The Group issues a warranty for its products. Any defects observed during the warranty period will be repaired at the company's expense or the customer will be provided with a corresponding product. The warranty provision is based on experience of defective products in earlier years. The warranty provision is expected to be used during the following year. The lawsuit that was pending against Vacon's subsidiary in China ended in December 2011. Three parties concerned who were accused in the same lawsuit have filed their complaints regarding the court decision, and it is possible that the court decision will change in a higher court of law for Vacon as well. Vacon has made a EUR 3.6 million (EUR 3.7 million in 2011) provision associated with the matter.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FINANCIAL STATEMENTS

28. MANAGEMENT OF FINANCIAL RISKS

The objective of financial risk management in the Group is to minimize the harmful impact of changes on the Group's financial result in a cost-effective manner. The Board of Directors of the parent company approves the Group's general principles for risk management, and the finance function at the Group's parent company is responsible for their practical implementation and identifies, assesses, and hedges for the Group's financial risks. Hedging transactions for financial risks are carried out in accordance with the treasury policy approved by Group management. The Group uses foreign exchange forwards, currency options, foreign currency loans, and interest rate swaps in its risk management. Derivative contracts are signed for hedging purposes, and hedge accounting, as defined in IFRS, is only applied to USD-denominated foreign exchange forwards when they hedge the cash flow from operations. Hedge accounting is not applied to derivative contracts that protect net investments.

Foreign exchange risk

The company has business operations in 29 countries. The Group supplies its products and services directly and through partners to a total of more than 100 countries. This means the Group is exposed to foreign exchange risks arising from, for example, currency-denominated trade receivables and trade payables, internal transactions as well as from currency-denominated loans, deposits and bank account balances.

The Group's biggest currency risks, however, arise from exports and imports. The Group's most important invoicing currencies other than the euro are the US dollar, which directly or indirectly accounts for approximately 18.5% (17.5%) of the Group's invoicing, and the Chinese renminbi, which directly accounts for approximately 14.7% (10.6%) of the Group's invoicing. Asian currencies account for a total of approximately 22.2% (15.9%) of the Group's invoicing and the European non-euro currencies for 7.4% (8.3%) of invoicing. Invoicing directly related to the euro thus accounted for 51.9% (58.3%) in 2012. Currency-linked purchases in the Group account for approximately 16.6% (16.6%) of revenues.

The tables below show the transaction positions in the Group's main currencies.

2012, EUR thousand	USD	GBP	SEK	NOK	AUD	CZK	RUB	CAD	CNY
Forecast items	-5,225	1,427	2,712	632	406	292	865	988	760
Assets	25,377	1,309	845	320	3,600	265	822	918	-5,507
Liabilities	-1,343	-36	-24	15	0	-8	0	-2	3,754
Hedging	-18,190	-2,345	-3,332	-906	-3,773	-324	-1,039	-1,865	0
Net position	619	355	201	60	233	225	649	39	-993
2011, EUR thousand	USD	GBP	SEK	NOK	AUD	CZK	DKK	RUB	CAD
---	---	---	---	---	---	---	---	---	---
Forecast items	2,153	1,618	3,069	895	442	559	1,087	1,083	749
Assets	29,545	1,151	1,252	323	2,852	11,457	1,672	757	826
Liabilities	-983	-32	-27	-15	-158	-27	-5	0	0
Hedging	-29,430	-2,428	-3,950	-1,096	-3,234	-9,778	-1,759	-958	-1,513
Net position	1,285	309	345	107	-98	2,211	995	882	61

In accordance with the Group's treasury policy, money transactions between the Group's parent company and subsidiaries are made in the subsidiary's business currency. Therefore, the majority of the transaction risk has been concentrated on the Group's parent company. In accordance with the Group's treasury policy, binding delivery and purchase contracts and trade receivables and trade payables are hedged in full with foreign exchange forwards and currency options. In addition, forecasted currency-denominated cash flows in the parent company are hedged for six months with about 70% of the estimated cash flow. In accordance with the treasury policy, items denominated in the Danish krone are not hedged at all.

VACON PLC | ANNUAL REPORT 2012

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

The table below shows the effect of the euro strengthening or weakening by 10% against the US dollar, British pound, Swedish krona, Norwegian krone, Australian dollar, Czech koruna, Russian ruble, Canadian dollar, and Chinese renminbi when all other factors remain unchanged. The sensitivity analysis is based on the foreign currency denominated assets and liabilities on the balance sheet date. The sensitivity analysis also takes into account the effect of foreign currency derivatives that net the impact of changes in exchange rates. The tax impact has not been accounted for.

Transaction risk	Strengthening of euro, 10%		Weakening of euro, 10%
Dec 31, 2012, EUR thousand	Equity (other comprehensive income)	Profit for the period	Equity (other comprehensive income)	Profit for the period
USD		-531		649
GBP		97		-119
SEK		228		-279
NOK		52		-64
AUD		16		-19
CZK		6		-7
RUB		20		-24
CAD		86		-105
CNY		-159		195
Transaction risk	Strengthening of euro, 10%		Weakening of euro, 10%
---	---	---	---	---
Dec 31, 2011, EUR thousand	Equity (other comprehensive income)	Profit for the period	Equity (other comprehensive income)	Profit for the period
USD	195	-117	-239	143
GBP	114	16	-140	-6
SEK	247	1	-302	-1
NOK	70	2	-85	-2
AUD	38	11	-47	-13
CZK	0	-150	0	184
DKK	8	0	-10	0
RUB	18	0	-22	0
CAD	62	0	-76	0
CNY	0	245	0	-299

The translation position consists of investments in non-Finnish subsidiaries. The Group's Board of Directors decides on the hedging policy and the main principle is to not hedge the translation position. The most significant exchange rate risks relating to foreign net investments come from the equity of the subsidiaries in the USA, China, and the Czech Republic.

The table below shows the Group's most significant translation positions.

EUR thousand	Translation position Dec 31, 2012	Translation position Dec 31, 2011
USD	5,305	5,410
CNY	4,063	4,093
CZK	4,433	58
Capital invested	13,801	9,561

Interest rate risk

The Group is exposed to interest rate risk due to the changes in market rates, on the one hand, and due to the risk related to reorganizations of interest income and expenses caused by the value changes in the balance sheet items, on the other. The Group hedges against interest rate risks through its choice of interest rate periods for loans and through derivative instruments. The Group's Board of Directors decides on the hedging policy and this is implemented by the Group's finance function.

The total amount of credit on the closing date was EUR 20.7 million, and this was 100% variable interest rate (EUR 25.2 million on December 31, 2011, with 100% variable interest rate). On the closing date, the Group did not have outstanding interest rate swaps (EUR 2.9 million on December 31, 2011). The average interest rate of loans was 1.14% (2.4%). The loan agreements contain normal covenant terms.

The table below shows the impact on the result of a one percentage point change in interest rates.

Interest rate sensitivity, EUR thousand	Dec 31, 2012	Dec 31, 2011
Interest rate rises, 1 percentage point
Variable interest loans	-200	-200
Interest rate swaps		29
Net impact on result	-200	-171
Interest rate decreases, 1 percentage point
Variable interest loans	200	200
Interest rate swaps		-12
Net impact on result	200	188

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FINANCIAL STATEMENTS

Counterparty and credit risk

Trade receivables are not associated with significant risk concentrations. Credit risks relating to commercial operations are primarily the responsibility of the operative units. A credit policy has been defined for the sales organization that governs the credit facilities granted to customers, delivery and payment terms and how they are monitored, and the collection of payment.

Country risk is continuously monitored and limits are set for granting credit in areas where the political or financial situation is unstable. The risk is also reduced by using letters of credit and payments in advance. About 74% (85%) of the Group's receivables are from OECD countries, which represent a low country risk.

During the financial year, credit losses recognized through profit and loss totaled EUR 0.6 million (EUR 8.6 million in 2011). The credit losses were due to unexpected changes in the financial environment of several customers. In 2012, the company succeeded in collecting overdue receivables from one of its solar energy customers. One-time items related to the successful collection of the receivable had a net impact of EUR 1.5 million on the company's operating profit. The Group monitors the liquidity of its customers on an ongoing basis and is active in collection.

Breakdown of trade receivables by due date, EUR thousand	2012	2011
Not yet due	51,518	48,831
1–90 days after due date	14,827	16,304
91–180 days after due date	1,280	4,394
181–270 days after due date	348	2,372
271–365 days after due date	313	238
Over 365 days after due date	0	0
Total	68,290	72,139

When the Group invests cash funds in bank deposits and enters into derivative contracts, it only accepts as counterparties such partner banks that are approved by the Board of Directors and listed in the financial policy.

Liquidity and refinancing risk

The Group continually assesses and monitors the amount of financing required by operations so that the Group has sufficient liquid funds to finance operations and to repay loans as they mature. The Group maintains its liquidity by means of effective cash management solutions such as Group accounts and bank credit facilities and by making investments that can be converted to cash quickly.

The Group manages the liquidity and refinancing risk by means of EUR 50 million syndicated loan arrangement, which consists of a term loan of EUR 20 million, which matures in 2016, and a EUR 30 million committed credit facility, which matures in 2014.

The amount of unused credit facilities on December 31, 2012, was EUR 38.1 (EUR 35.7) million, of which the amount of committed credit facilities was EUR 32.3 million and the amount of facilities to be renewed annually EUR 5.8 million. Surplus liquid funds are invested in partner banks. Liquid funds on December 31, 2012, totaled EUR 31.1 (16.3) million.

The following table shows a maturity analysis based on the contracts made. The figures are not discounted and include interest payments and repayment of capital.

EUR thousand Dec 31, 2012	Carrying amount	Cash flow	Less than 1 year	1-2 years	2-5 years
Bank loans	20,743	-20,792	-3,099	-3,062	-14,607
Trade payables and other current debts	35,957	-35,957	-35,957
Financial commitments		-40	-40
Total	56,700	-56,789	-39,096	-3,062	-14,607
Foreign exchange forwards and currency options
- Payable cash flows		-40,971	-40,971
- Receivable cash flows		41,610	41,610
Total	0	639	639
Contracts of suretyship, maximum		-16,132	-7,890	-401	-1,066
EUR thousand Dec 31, 2011	Carrying amount	Cash flow	Less than 1 year	1-2 years	2-5 years
Bank loans	25,180	-26,915	-5,443	-6,597	-14,874
Trade payables and other current debts	36,465	-36,465	-36,465
Financial commitments		-60	-60
Check credit facility	3,563	-3,582	-3,582
Total	65,208	-67,022	-45,550	-6,597	-14,874
Foreign exchange forwards
- Payable cash flows		-54,144	-54,144
- Receivable cash flows		53,114	53,114
Interest rate swaps	64	-64	-64
Total	64	-1,094	-1,094
Contracts of suretyship, maximum		-17,237	-8,949	-1,525	-6,763

VACON PLC | ANNUAL REPORT 2012

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Equity management

The objective of the Group's equity management is to support business operations through an optimal equity structure by ensuring normal operating conditions and to increase shareholder value. The goal is to obtain the best possible profit. The optimal equity structure also ensures the small cost of capital. Most of the Group's growth is organic, but Vacon does not exclude the possibility of acquisitions. Organic growth will be financed by cash flow from operations and, in the case of further acquisitions, the gearing can be increased to a maximum of 60%.

The Group's equity structure is monitored with gearing. Gearing is calculated by dividing interest-bearing liabilities by total equity. Net liabilities include interest-bearing liabilities less cash and cash equivalents. The Group's interest-bearing net liabilities at the end of 2012 amounted to EUR -10.3 million (EUR 12.4 million on December 31, 2011) and gearing was -9.5% (12.7%).

Gearing was as follows:

EUR thousand	2012	2011
Interest-bearing liabilities	20,743	28,744
Cash and cash equivalents	-31,074	-16,305
Net liabilities	-10,331	12,438
Total equity	108,546	97,713
Gearing, %	-9.5	12.7

29. OPERATING LEASES

EUR thousand	2012	2011
Minimum rents for irrevocable operating leases:
In one year	8,714	8,181
In more than one and less than five years	27,872	26,183
In more than five years	9,608	18,605
Total	46,194	52,969

The Group has leased most of the production and office facilities it uses. The duration of lease agreements is 3-15 years and the agreements normally include an option to extend the agreement after the original expiration date. The agreements usually contain an index clause.

30. CONTINGENT LIABILITIES AND ASSETS

EUR thousand	2012	2011
Collateral and contingencies given on one's own behalf
Contract guarantees	2,536	2,326
Guarantees	7,252	11,031
Financial commitment in capital investment funds	40	84
Total	9,828	13,441
Collateral and contingencies given on behalf of others
Contract guarantees	1,558	254
Guarantees	4,787	3,625
Total	6,345	3,880

An agreement has been reached on EUR 17.3 million (EUR 8.0 million in 2011) credit facilities for which the Group companies have jointly provided a contingency.

The parent company has a pending tax proceeding regarding the tax inspection of transfer pricing.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FINANCIAL STATEMENTS

31. RELATED PARTY TRANSACTIONS

Vacon Group has a related party relationship with its associated companies, Board members, the parent company's President and CEO, the Management Team and their immediate families, and companies in which the said persons have a controlling interest or in which they exercise significant control.

The Group's control in its parent company and subsidiaries is as follows:

The Group's parent company is Vacon Plc, Vaasa, Finland	Group holding (%)	Group votes (%)
Group subsidiaries:
Vacon GmbH, Essen, Germany	100	100
Vacon Benelux B.V., Gorinchem, the Netherlands	100	100
Vacon SpA, Reggio Emilia, Italy	100	100
Vacon Drives Ibérica S.A., Terrassa, Spain	100	100
Vacon Drives (UK) Ltd, Leicestershire, UK	70	70
Vacon AB, Solna, Sweden	100	100
Vacon AT Antriebssysteme GmbH, Leobersdorf, Austria	70	70
ZAO Vacon Drives, Moscow, Russia	100	100
Vacon France SAS, Saint Pierre du Perray, France	70	70
Vacon AS, Holmestrand, Norway	80	80
Vacon Benelux NV/Sa, Heverlee, Belgium	100	100
Vacon Suzhou Drives Co. Ltd., Suzhou, China	100	100
Vacon Drives & Control Pvt Ltd, Chennai, India	100	100
Vacon Pacific Pty Ltd, Melbourne, Australia	100	100
Vacon Inc., Chambersburg, PA, USA	100	100
Vacon s.r.l., Postal, Italy	100	100
Vacon s.r.o., Prague, Czech Republic	100	100
Vaasa Control de Mexico, Mexico City, Mexico	100	100
Vacon Drives A/S, Sønderborg, Denmark	100	100
Vacon Korea Ltd, Seoul, South Korea	100	100
Vacon Canada Inc, Stratford, Ontario, Canada	100	100
Vacon America Latina Ltda, São Paulo, Brazil	96	96
Vacon Solar S.L., Manresa, Spain	100	100
Vacon Pte Ltd, Singapore	100	100

Management cash-based employment benefits:

EUR thousand	2012	2011
Salaries and other short-term benefits	1,159	2,168
Benefits to be paid on dismissal	1,378	1,629
Post-employment benefits	1,419	1,055
Share-based benefits	331	2,282
Total	4,286	7,134

Management salaries and fees:

EUR thousand	2012	2011
Vesa Laisi, President and CEO	452	1,031
Hiltunen Heikki, Deputy to the CEO	344	795
Board members:
Jan Inborr, Chairman of the Board of Directors	44	90
Pekka Ahlqvist	21	45
Jari Eklund	25	45
Juha Kytölä	25	45
Panu Routila	25	45
Mika Vehviläinen, Vice Chairman	23	45
Riitta Viitala	23	45
Total	981	2,186

The retirement age of the parent company's President and CEO is 60 years. The company has taken out pension insurance for the President and CEO, on the basis of which the pension to be paid is 60% of the salary that the pension is based on. The pension ends when the President and CEO turns 65. The salary that the pension is determined on is based on the average monthly salary calculated from the TyEL employee pension earnings basis from the last four years. The members of the Management Team have an equivalent pension age and pension insurance.

VACON PLC | ANNUAL REPORT 2012

FINANCIAL STATEMENTS

PARENT COMPANY'S FINANCIAL STATEMENTS

VACON PLC | ANNUAL REPORT 2012
95

INCOME STATEMENT OF THE PARENT COMPANY (FAS)

EUR thousand	Note	Jan 1-Dec 31, 2012	%	Jan 1-Dec 31, 2011	%
Revenues	2	249,603	100.0	271,257	100.0
Change in inventories of finished goods and work in progress		250		-1,332
Other operating income	3	151		276
Materials and services
Materials and consumables
Purchases during the financial year		-141,473		-151,209
Change in inventories		1,215		-1,863
External services		-5,445		-5,325
		-145,703	-58.4	-158,397	-58.4
Personnel expenses	4	-41,937		-40,569
Depreciation/amortization	7	-4,836		-5,504
Other operating expenses		-41,402		-47,242
Operating profit		16,124	6.5	18,489	6.8
Financial income and expenses	9	8,190		6,464
Profit before appropriations and taxes		24,314	9.7	24,953	9.2
Appropriations	10	628		927
Income taxes	11	-4,398		-5,356
Profit for the period		20,544	8.2	20,524	7.6

BALANCE SHEET FOR THE PARENT COMPANY (FAS)
FINANCIAL STATEMENTS

Assets, EUR thousand	Note	Dec 31, 2012	%	Dec 31, 2011	%
Non-current assets
Intangible assets	12
Intangible rights		2,519		3,116
Other long-term expenditure		915		1,114
		3,434	2.4	4,231	2.9
Tangible assets	13
Land and water areas		132		132
Machinery and equipment		10,082		9,918
Other tangible assets		42		42
Construction in progress		736		1,941
		10,991	7.7	12,033	8.3
Investments	14
Investments in Group companies	15	20,543		15,756
Receivables from Group companies		29,527		28,221
Other shares and investments		2,893		3,154
Other receivables		1,044		17
		54,007	37.8	47,148	32.5
Total non-current assets		68,432	47.9	63,411	43.7
Current assets
Inventories
Materials and consumables		5,921		4,706
Finished goods		2,671		2,421
		8,592	6.0	7,128	4.9
Current receivables	16
Trade receivables		54,140		65,633
Loan receivables		1,706		1,527
Other receivables		2,528		3,093
Prepaid expenses and accrued income	17	1,917		1,759
		60,292	42.2	72,012	49.6
Cash and cash equivalents		5,649		2,576
Total current assets		74,532	52.1	81,715	56.3
Total assets		142,964	100.0	145,126	100.0
Equity and liabilities, EUR thousand	Note	Dec 31, 2012	%	Dec 31, 2011	%
---	---	---	---	---	---
Equity	18.19
Share capital		3,059		3,059
Share premium		4,966		4,966
Retained earnings		49,152		44,688
Profit for the period		20,544		20,524
Total equity		77,721	54.4	73,238	50.5
Accumulated appropriations
Depreciation difference	20	3,046	2.1	3,674	2.5
Liabilities	21
Non-current liabilities
Loans from financial institutions		17,140	12.0	20,000	13.8
Current liabilities
Loans from financial institutions		2,860		3,435
Advance payments received		0		351
Trade payables		22,614		27,184
Other current liabilities		6,515		6,720
Provisions		3,956		3,154
Accrued expenses and deferred income	22	9,111		7,371
		45,057	31.5	48,215	33.2
Total liabilities		62,197	43.5	68,215	47.0
Liabilities total		142,964	100.0	145,126	100.0

VACON PLC | ANNUAL REPORT 2012

CASH FLOW STATEMENT FOR THE PARENT COMPANY (FAS)

EUR thousand	Jan 1–Dec 31, 2012	Jan 1–Dec 31, 2011
Cash flow from operating activities
Profit for the period	20,544	20,524
Adjustments:
Depreciation/amortization	4,836	5,504
Financial income and expenses	-8,190	-6,464
Appropriations	-628	-927
Taxes	4,398	5,356
Other adjustments	-84	117
	20,877	24,109
Changes in working capital:
Change in current receivables	11,819	6,035
Change in inventories	-1,465	3,195
Change in non-interest-bearing liabilities	-2,607	-5,752
	7,747	3,477
Interest received	538	448
Interest paid	-540	-750
Dividends received	8,364	3,329
Other financial items	-592	-415
Taxes paid	-3,972	-8,885
Cash flow from operating activities	32,422	21,313
Cash flow from investing activities
Investments in tangible and intangible assets	-2,998	-4,959
Loans granted	-2,838	-9,107
Other investments	-77	-39
Repayments on loan receivables	359	1,648
Sold shares in subsidiaries	0	43
Purchased shares in subsidiaries	-4,787	0
Proceeds from the divestiture of other investments	305	2,831
Dividends received	0	694
Cash flow from investing activities	-10,036	-8,888
Cash flow from financing activities
Purchasing of own shares	-2,326	0
Proceeds from long-term borrowings	0	20,000
Repayments on long-term loans	0	-9,542
Proceeds from short-term borrowings	1,849	6,190
Repayments on short-term loans	-5,102	-16,076
Dividends paid	-13,734	-15,214
Cash flow from financing activities	-19,313	-14,641
Change in cash and cash equivalents	3,073	-2,216
Cash and cash equivalent at start of the year	2,576	4,792
Cash and cash equivalent at end of the year	5,649	2,576

NOTES TO THE FINANCIAL STATEMENTS OF THE PARENT COMPANY
FINANCIAL STATEMENTS

1. ACCOUNTING PRINCIPLES FOR FINANCIAL STATEMENTS

General accounting principles

The financial statements of Vacon Plc have been prepared and presented in accordance with the Finnish Accounting Standards (FAS) and other laws and regulations in force in Finland.

When preparing the financial statements, the company's management is required by the regulations in force and good accounting practice to make assessments and assumptions that affect the valuation and allocation of the financial statement items. Although the assessments are based on the latest available information, the final figures may differ from these assessments.

Revenues

Sales are recognized in connection with the transfer of ownership-related risks and benefits to the buyer. Usually, sales are recognized at the date of delivery. Sales adjustment items include cash discounts as well as exchange rate profits and losses on sales.

Long-term projects are partially recognized as income for the financial period in cases that involve fixed-price contracts the outcome of which can be reliably assessed. The percentage-of-completion required in long-term projects is measured from the share of the to-date costs of the estimated total costs of the project, i.e. using the cost-to-cost method. If it is likely that the overall costs of the project will exceed the overall income, the expected losses are immediately recognized as expenses.

Other operating income

Items recognized as other operating revenues are gains on the sale of assets, subsidies received and other regular revenues not related to sales of goods or services such as rents.

Foreign currency items

Business transactions in foreign currencies are recognized at the exchange rates on the transaction date. Receivables and payables on the closing date are valued at the average exchange rate on the closing date. Exchange rate differences associated with sales and purchases are recognized as adjustments to these items. Exchange rate gains and losses related to financial operations are recognized under financial income and expenses.

Derivative contracts

Foreign currency items are hedged with foreign exchange forwards and currency options. Open hedging instruments for foreign currency items are valued at fair value on the closing date and recognized under sales adjustment items or financial items, based on the item to be hedged, in the income statement. Interest rate derivatives are used to manage interest rate exposure. Interest swaps are measured on the basis of the interest rates of the closing date. There are no outstanding interest rate swaps in the 2012 financial statements. The accounting principles for the consolidated financial statements contain more details about the use of financial instruments.

Pension arrangements

Statutory and any supplementary pension obligations are covered through payments to pension insurance companies and recognized as expenses in accordance with actuarial calculations by those institutions.

Leasing and rental liabilities

Leasing payments are treated as rent expenses. Unpaid leasing and rental fees are recognized under leasing and rental liabilities in the notes to the parent company's financial statements.

Income taxes

The company's taxes include taxes paid and accrued corresponding to the financial result for the period on the basis of taxable income calculated in accordance with Finnish tax regulations, and adjustments to taxes from previous financial periods.

R&D costs

R&D costs are recognized as expenses. R&D grants received are recognized as deductions under the relevant items. The accounting principles for the consolidated financial statements have more details about capitalizing R&D expenses.

Fixed assets and depreciation

Fixed assets are measured on the balance sheet at their original acquisition cost less accumulated planned depreciation. Planned depreciation is calculated on a straight-line basis for the items on the original acquisition cost, based on the estimated useful economic life. The depreciation schedule in accordance with the consolidated accounting principles is as follows:

Intangible assets	3-5 years
Machinery and equipment	3-15 years
Other tangible assets	5-10 years

Investments

Long-term investments are valued at acquisition cost. When disposing of a non-current investment, the difference between sales price and current balance sheet value is recognized as an expense or income.

Investments in subsidiaries are valued at acquisition cost in the statement of financial position. Investments in associated companies are presented as other long-term investments in the statement of financial position. Associated companies are companies in which Vacon has 20-50% of the voting rights or in which Vacon has a significant but not controlling interest. During the 2012 financial year, Vacon had no investments in associated companies.

Inventories

Inventories are valued at the acquisition cost or the net realizable value, whichever is lower. The acquisition cost has been determined using the FIFO method. The acquisition cost of finished goods and work in progress includes raw materials, direct salaries, and other direct expenses as well as the appropriate share of indirect production costs, excluding interest expenses. When applying the lowest value principle, the value is based on the estimated sales price in ordinary activities less the costs associated with the sale of products.

Provisions

Items related to contracts and other effective obligations that are likely to require financial resources are recognized in the statement of financial position as provisions, if their amount can be reliably assessed. These items currently include warranty provisions and other mandatory provisions. The anticipated future warranty costs of delivered products are recognized as warranty provisions. Realized warranty costs, with changes in warranty liability taken into account, are recognized in the income statement in the period during which they are incurred.

Dividends and own shares

Dividends proposed by the Board of Directors are not recognized in the financial statements until they have been approved by the Annual General Meeting.

When purchasing the company's own shares, the amount paid for them, including the direct purchase costs, is recognized as a decrease in shareholders' equity.

VACON PLC | ANNUAL REPORT 2012
99

NOTES TO THE FINANCIAL STATEMENTS OF THE PARENT COMPANY

2. REVENUES

Revenues are divided into three geographical market areas: EMEA (Europe, the Middle East, and Africa), the Americas (North and South America), and APAC (Asia Pacific region). Revenues are divided according to the location of customers.

EUR thousand	2012	2011
Revenues by market area
EMEA	166,135	188,122
Americas	56,954	53,112
APAC	26,513	30,023
Total	249,603	271,257

3. OTHER OPERATING INCOME

EUR thousand	2012	2011
Rental income	79	159
Subsidies	23	0
Other	50	116
Total	151	276

4. PERSONNEL EXPENSES

EUR thousand	2012	2011
Wages, salaries, and bonuses	34,439	33,302
Pension costs	5,632	5,472
Other personnel costs	1,866	1,796
Total	41,937	40,569
Management salaries and fees
President and CEO and his deputy	796	1,826
Members of the Board of Directors	185	360
Total	981	2,186

Salaries and fees of the President and CEO, his deputy, and Board members are presented in Note 31 to the Consolidated Financial Statements.

5. AVERAGE NUMBER OF PERSONNEL

	2012	2011
Office personnel	392	413
Factory personnel	321	355
Total	713	768

6. PRESIDENT AND CEO'S PENSION COMMITMENTS

The retirement age of the parent company's President and CEO is 60 years.

7. DEPRECIATION AND AMORTIZATION

EUR thousand	2012	2011
Intangible assets	1,849	2,466
Tangible assets	2,987	3,038
Total planned depreciation	4,836	5,504

8. AUDITOR'S FEES

EUR thousand	2012	2011
Audit fees	38	32
Tax consulting	115	64
Other services	47	50
Total	200	147

NOTES TO THE FINANCIAL STATEMENTS OF THE PARENT COMPANY
FINANCIAL STATEMENTS

9. FINANCIAL INCOME AND EXPENSES

EUR thousand	2012	2011
Income from non-current asset investments	154	2,599
Dividend income from Group companies	8,364	3,329
Dividend income from others	0	694
Interest income from Group companies	531	407
Other interest income and financial income from others	4,151	4,554
Total	13,046	8,983
Interest income and financial income, total	13,200	11,583
Interest income and financial expenses to others	-5,011	-5,119
Financial income and expenses, total	8,190	6,464
The item 'Other interest and financial income from others' includes unrealized exchange rate gains	2,843	3,045

10. APPROPRIATIONS

EUR thousand	2012	2011
The difference between planned depreciation and depreciation presented for taxation	628	927

11. INCOME TAXES

EUR thousand	2012	2011
Direct taxes for current year	-4,096	-5,306
Direct taxes for previous years	-138	25
Other taxes and similar payments	-164	-75
Total	-4,398	-5,356

12. INTANGIBLE ASSETS

EUR thousand	Intangible rights	Other long-term expenditure	Total 2012	Total 2011
Acquisition cost, Jan 1	14,310	1,835	16,145	15,228
Increases	986	66	1,053	917
Acquisition cost, Dec 31	15,296	1,902	17,198	16,145
Accumulated amortization, Jan 1	-11,194	-721	-11,915	-9,449
Amortization for the financial year	-1,584	-266	-1,849	-2,466
Accumulated amortization, Dec 31	-12,777	-987	-13,764	-11,915
Carrying amount, Dec 31, 2012	2,519	915	3,434
Carrying amount, Dec 31, 2011	3,116	1,114		4,231

VACON PLC | ANNUAL REPORT 2012
101

NOTES TO THE FINANCIAL STATEMENTS OF THE PARENT COMPANY

TANGIBLE ASSETS

EUR thousand	Land and water areas	Machinery and equipment	Advance payments and construction in progress	Other tangible assets	Total 2012	Total 2011
Acquisition cost, Jan 1	132	35,380	1,941	42	37,495	33,453
Increases	0	3,151	570	0	3,721	5,630
Decreases	0	0	-1,775	0	-1,775	-1,589
Acquisition cost, Dec 31	132	38,531	736	42	39,440	37,495
Accumulated depreciation, Jan 1	0	-25,462	0	0	-25,462	-22,424
Depreciation for the financial year	0	-2,987	0	0	-2,987	-3,038
Accumulated depreciation, Dec 31	0	-28,449	0	0	-28,449	-25,462
Carrying amount, Dec 31, 2012	132	10,082	736	42	10,991
Carrying amount, Dec 31, 2011	132	9,918	1,941	42		12,033
Carrying amount of production machinery and equipment Dec 31, 2012		9,734
Carrying amount of production machinery and equipment Dec 31, 2011		9,411

INVESTMENTS

EUR thousand	Investments in Group companies	Other shares and investments	Total 2012	Total 2011
Shares, Jan 1	15,756	3,154	18,910	19,151
Increases	4,787	44	4,831	34
Decreases	0	-305	-305	-275
Carrying amount, Dec 31	20,543	2,893	23,436	18,910
	Receivables from Group companies	Other receivables	Total 2012	Total 2011
Receivables, Jan 1	28,221	17	28,238	19,939
Increases	1,665	1,026	2,691	9,111
Decreases and transfers between items	-359	0	-359	-812
Carrying amount, Dec 31	29,527	1,044	30,571	28,238
Total investments, Dec 31			54,007	47,148

NOTES TO THE FINANCIAL STATEMENTS OF THE PARENT COMPANY
FINANCIAL STATEMENTS

15. SHAREHOLDINGS

	Parent company votes %	Parent company holding %
Shares in subsidiaries:
Vacon GmbH, Essen, Germany	100	100
Vacon Benelux B.V., Gorinchem, the Netherlands	100	100
Vacon SpA, Reggio Emilia, Italy	100	100
Vacon Drives Ibérica S.A., Terrassa, Spain	100	100
Vacon Drives (UK) Ltd, Leicestershire, UK	70	70
Vacon AB, Solna, Sweden	100	100
Vacon AT Antriebssysteme GmbH, Leobersdorf, Austria	70	70
ZAO Vacon Drives, Moscow, Russia	100	100
Vacon France SAS, Saint Pierre du Perray, France	70	70
Vacon AS, Holmestrand, Norway	80	80
Vacon Benelux NV/Sa, Heverlee, Belgium	99	99
Vacon Suzhou Drives Co. Ltd., Suzhou, China	100	100
Vacon Drives & Control Pvt Ltd, Chennai, India	100	100
Vacon Pacific Pty Ltd, Melbourne, Australia	100	100
Vacon Inc., Chambersburg, PA, USA	100	100
Vacon s.r.o., Prague, Czech Republic	100	100
Vaasa Control de Mexico, Mexico City, Mexico	100	100
Vacon Drives A/S, Sønderborg, Denmark	100	100
Vacon Korea Ltd, Seoul, South Korea	100	100
Vacon Canada Inc, Stratford, Ontario, Canada	100	100
Vacon America Latina Ltda, São Paulo, Brazil	96	96
Vacon Solar S.L., Manresa, Spain	100	100
Vacon Pte Ltd, Singapore	100	100

16. CURRENT RECEIVABLES

EUR thousand	2012	2011
Receivables from Group companies
Trade receivables	34,984	43,878
Loan receivables	1,706	1,527
Total	36,690	45,405
Receivables from others
Trade receivables	19,156	21,756
Other receivables	2,528	3,093
Prepaid expenses and accrued income	1,917	1,759
Total	23,602	26,607
Current receivables, total	60,292	72,012

17. KEY ITEMS INCLUDED IN PREPAID EXPENSES AND ACCRUED INCOME

EUR thousand	2012	2011
Foreign currency hedging	447	255
Tax assets	0	128
Subsidies	305	381
Share bonus receivables	173	835
Advances paid	648	152
Other	344	8
Total	1,917	1,759

VACON PLC | ANNUAL REPORT 2012
103

NOTES TO THE FINANCIAL STATEMENTS OF THE PARENT COMPANY

EQUITY

EUR thousand	2012	2011
Share capital, Jan 1	3,059	3,059
Share capital, Dec 31	3,059	3,059
Share premium, Jan 1	4,966	4,966
Share premium, Dec 31	4,966	4,966
Total restricted equity	8,025	8,025
Retained earnings, Jan 1	65,212	59,903
Dividends paid	-13,734	-15,214
Purchase of own shares	-2,326	0
Retained earnings, Dec 31	49,152	44,688
Profit for the period	20,544	20,524
Total non-restricted equity	69,696	65,212
Total equity	77,721	73,238

CALCULATION OF DISTRIBUTABLE FUNDS

EUR thousand	2012	2011
Retained earnings	49,152	44,688
Profit for the period	20,544	20,524
Total	69,696	65,212

ACCUMULATED APPROPRIATIONS

In the parent company, accumulated amortization difference accounts for the accumulated appropriations.

LIABILITIES

EUR thousand	2012	2011
Non-current liabilities
Interest-bearing loans from financial institutions	17,140	20,000
Non-current liabilities, total	17,140	20,000
Current liabilities
Interest-bearing
Loans from financial institutions	2,860	3,435
Loans to Group companies	5,826	5,830
Total	8,686	9,265
The unused facility of checking accounts in the parent company amounts to EUR 26.8 million.
Non-interest-bearing
Advance payments received	0	351
Trade payables to others	20,108	23,901
Trade payables to Group companies	2,506	3,283
Other current liabilities	689	891
Warranty provisions	3,260	3,154
Other provisions	696	0
Accrued expenses and deferred income	8,924	7,178
Accrued debts to Group companies	186	193
Total	36,370	38,950
Current liabilities, total	45,057	48,215
Interest-bearing liabilities	25,826	29,265
Non-interest-bearing liabilities	36,370	38,950
Total liabilities	62,197	68,215

NOTES TO THE FINANCIAL STATEMENTS OF THE PARENT COMPANY
FINANCIAL STATEMENTS

KEY ITEMS INCLUDED IN ACCRUED EXPENSES AND DEFERRED INCOME

EUR thousand	2012	2011
Salaries including social security costs	8,192	5,192
Taxes	299	0
Interest	13	95
Materials and consumables allocated to period	576	1,139
Foreign currency hedging	31	946
Total	9,111	7,371

CURRENCY DERIVATIVES

EUR thousand	2012	2011
Forward contracts and option agreements
Changes in value entered in income statement	416	-691
Nominal amount	41,610	53,114
Interest rate swaps
Changes in value entered in income statement	0	-64

Derivative contracts are used for hedging against currency and interest risks. The forward contracts and option agreements mentioned above were open on the closing date and mature during the financial period starting on January 1, 2013.

COLLATERAL AND CONTINGENT LIABILITIES

EUR thousand	2012	2011
Contract guarantees
On behalf of Group companies	9,788	13,357
On behalf of others	308	254
Total	10,095	13,612
Other commitments
Commitment on a subsidiary's debts	1,545	3,368
Financial commitments	40	84
Total	1,585	3,452

Vacon Plc is responsible for all costs that incur from Vacon Benelux B.V.'s legal procedures, as referred to in Section 403.1f, Book 2 of the Dutch Civil Code.

The parent company has a pending tax proceeding regarding the tax inspection of transfer pricing.

Amounts payable under leasing agreements

Payable in the following financial year	941	839
Payable later	863	937
Total	1,804	1,775
Payable amounts on rental agreements
Payable in the following financial year	3,348	3,423
Payable later	13,993	15,588
Total	17,341	19,011

VACON PLC | ANNUAL REPORT 2012

SIGNATURE FOR THE BOARD OF DIRECTORS' REPORT AND FINANCIAL STATEMENTS

Vaasa, February 4, 2013

Jan Inborr
Chairman

Pekka Ahlqvist

Jari Eklund

Juha Kytölä

Panu Routila

Mika Vehviläinen

Riitta Viitala

Vesa Laisi
President and CEO

106

AUDITOR'S REPORT
FINANCIAL STATEMENTS

To the Annual General Meeting of Vacon Oyj

We have audited the accounting records, the financial statements, the report of the Board of Directors and the administration of Vacon Oyj for the year ended 31 December, 2012. The financial statements comprise the consolidated statement of financial position, income statement, statement of comprehensive income, statement of changes in equity and statement of cash flows, and notes to the consolidated financial statements, as well as the parent company's balance sheet, income statement, cash flow statement and notes to the financial statements.

Responsibility of the Board of Directors and the Managing Director

The Board of Directors and the Managing Director are responsible for the preparation of consolidated financial statements that give a true and fair view in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU, as well as for the preparation of financial statements and the report of the Board of Directors that give a true and fair view in accordance with the laws and regulations governing the preparation of the financial statements and the report of the Board of Directors in Finland. The Board of Directors is responsible for the appropriate arrangement of the control of the company's accounts and finances, and the Managing Director shall see to it that the accounts of the company are in compliance with the law and that its financial affairs have been arranged in a reliable manner.

Auditor's Responsibility

Our responsibility is to express an opinion on the financial statements, on the consolidated financial statements and on the report of the Board of Directors based on our audit. The Auditing Act requires that we comply with the requirements of professional ethics. We conducted our audit in accordance with good auditing practice in Finland. Good auditing practice requires that we plan and perform the audit to obtain reasonable

assurance about whether the financial statements and the report of the Board of Directors are free from material misstatement, and whether the members of the Board of Directors of the parent company or the Managing Director are guilty of an act or negligence which may result in liability in damages towards the company or whether they have violated the Limited Liability Companies Act or the articles of association of the company.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements and the report of the Board of Directors. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation of financial statements and report of the Board of Directors that give a true and fair view in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements and the report of the Board of Directors.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion on the Consolidated Financial Statements

In our opinion, the consolidated financial statements give a true and fair view of the financial position, financial performance, and cash flows of the group in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU.

Opinion on the Company's Financial Statements and the Report of the Board of Directors

In our opinion, the financial statements and the report of the Board of Directors give a true and fair view of both

the consolidated and the parent company's financial performance and financial position in accordance with the laws and regulations governing the preparation of the financial statements and the report of the Board of Directors in Finland. The information in the report of the Board of Directors is consistent with the information in the financial statements.

Vaasa, February 4, 2013

PricewaterhouseCoopers Oy
Authorised Public Accountants

Markku Katajisto
Authorised Public Accountant

VACON PLC | ANNUAL REPORT 2012
107

INVESTOR INFORMATION

INVESTOR INFORMATION
FINANCIAL STATEMENTS

SHARES AND SHAREHOLDERS

LISTING, TRADING, AND SHARE CAPITAL

Vacon has one share series. The share is listed on the Mid Cap list of NASDAQ OMX Helsinki in its sector Industrials. At the end of 2012, Vacon Plc's market value was EUR 611.5 (EUR 471.5) million excluding own shares owned by the company.

During 2012, a total of 3,150,916 company shares with a value of EUR 119.4 million were traded on the stock exchange. The highest share price during the year was EUR 42.54 and the lowest EUR 31.11. The closing price on December 31, 2012, was EUR 40.20.

Vacon's share capital is EUR 3,059,000. The number of Vacon's shares is 15,295,000. All shares have been paid in full and each share confers one vote at the Annual General Meeting.

AUTHORIZATIONS HELD BY THE BOARD OF DIRECTORS

Vacon Plc's Annual General Meeting on March 27, 2012, authorized the Board of Directors to decide on the purchase of the company's own shares and to decide on a share issue.

The number of own shares that may be purchased and disposed of shall be no more than 1,450,000, which corresponds to approximately 9.5 percent of the total number of shares in the company. Only non-restricted equity may be used for purchasing own shares on the basis of the Board of Directors' authorization. The company and its subsidiaries jointly may not at any time own more than ten (10) percent of the company's own shares. Own shares may be purchased on the purchasing date at a price determined in public trading or at a price otherwise determined by the market.

The Board of Directors shall be authorized to decide on the manner and other conditions for the purchase of the company's own shares. Derivatives, among others, may be used in the purchase. The shares may be repurchased in deviation from the shareholders' pre-emptive rights (directed repurchase of shares).

The authorization is valid until June 30, 2013. The authorization cancels the authorization given by the Annual General Meeting on March 22, 2011, regarding the purchase of own shares.

The Annual General Meeting held on March 27, 2012, also authorized the Board of Directors to decide on the disposal of the company's own shares held by the company in one or several installments through a share issue. The maximum number of own shares to be disposed of on the basis of the authorization is 1,529,500.

The authorization includes the right of the Board of Directors to decide on all terms and conditions on which the shares are disposed of and the shares can, thus, be disposed of by derogation from the pre-emptive rights of the shareholders (directed share issue). The authorization is valid for five (5) years from the date of the decision of the Annual General Meeting and it cancels the authorization given by the Annual General Meeting on March 22, 2011, regarding the purchase of own shares.

TREASURY SHARES

At the end of 2012, the Vacon Group held a total of 83,227 treasury shares (35,008 at the end of 2011), corresponding to 0.5% of the total number of shares. At the end of 2012, the market value of these treasury shares was EUR 3.3 million.

NOTIFICATION OF CHANGES IN HOLDINGS

Vacon Plc received notifications of changes in shareholding in 2012 as follows:

On November 19, 2012 Vacon Plc received a notification under Section 9 of Chapter 2 of the Securities Markets Act, stating that the holding of Ameriprise Financial, Inc. and companies belonging to it in Vacon Plc share capital and voting rights had exceeded 5%.

According to the notification, the combined direct and indirect shareholding of Ameriprise Financial, Inc. and its companies is now 772,623 Vacon Plc shares, which corresponds to 5.1% of the shares and voting rights in Vacon Plc. The number of shares exceeded the aforementioned threshold in share trading on 16 November 2012.

On November 1, 2012 Vacon Plc received a notification under Section 9 of Chapter 2 of the Securities Markets Act, stating that the holding of AC Invest Three B.V. (business ID 51490994), a subsidiary of Ahlström Capital Oy (business ID 1670034-3), in Vacon Plc shares had fallen below the 3/20 (15%) threshold. According to the notification, AC Invest Three B.V. owns 2,064,844 Vacon Plc shares, which corresponds to 13.5% of the shares and voting rights in Vacon Plc. The number of shares fell below the aforementioned threshold in share trading on November 1, 2012.

INCENTIVE SCHEMES

The new share bonus scheme has three earnings periods, the calendar years 2011, 2012, and 2013. The company's Board of Directors defines the target group, earnings criteria and targets at the beginning of each earnings period. The possible bonus for the earnings period 2012 is based on Vacon Group's revenues, operating profit and working capital turnover, and it is paid out as a combination of the company's shares and cash in 2013. The share-based bonus scheme also contains a fourth earnings period for the members of the Management Team. This four-year earnings period is based on the Group's long-term strategy and covers the calendar years 2011-2014. The possible bonus on the scheme for the earnings period 2011-2014 is based on Vacon Group's long-term strategic revenues and operating profit targets and will be paid out in 2015 as a combination of the company's shares and cash.

The share-based bonus scheme has a target group of approximately 70 people. The net bonuses to be paid based on the share-based incentive scheme total a maximum of 240,250 Vacon Plc shares. Additionally, Vacon has a bonus scheme for all personnel.

VACON PLC | ANNUAL REPORT 2012
109

INVESTOR INFORMATION

DIVIDEND POLICY

The dividend policy adopted by Vacon's Board of Directors is to propose to the Annual General Meeting for approval a dividend that is in line with the company's financial performance. The goal is to distribute approximately 50% of the period's net profit in dividends. When determining the dividend, the financing required for the growth of operations is taken into consideration. Vacon's Board of Directors has decided to propose to the Annual General Meeting to be held on March 26, 2013, that a dividend of EUR 1.10, or 64.7% of the Group's earnings per share, be paid for 2012.

SHAREHOLDERS

On December 31, 2012, Vacon had a total of 4,665 shareholders. The number of shares owned by nominee registered and foreign investors decreased by 1.8 percentage points during the period under review.

At the end of 2012, 51.2% of the company's shares was owned by nominee registered and foreign shareholders. Private persons owned 26.8% of the shares.

Vacon had a market capitalization at the end of December of EUR 611.5 (471.5) million. The closing share price on December 31, 2012 was EUR 40.20. The lowest share price during the January-December period was EUR 31.11 and the highest EUR 42.54.

A total of 3,150,916 Vacon shares (20.7% of the share stock) were traded on the stock exchange in January-December, or in monetary terms EUR 119.4 million.

CURRENT INFORMATION ON

Vacon's share price and ownership structure is available on Vacon's website at www.vacon.com.

DISTRIBUTION OF SHAREHOLDING

Share distribution

Number of shares	Number of shareholders	% of shareholders	Number of shares	% of shares
1-50	1,051	22.5%	29,692	0.2%
51-100	856	18.3%	77,192	0.5%
101-500	2,003	42.9%	512,524	3.4%
501-1000	342	7.3%	269,013	1.8%
1001- 5000	284	6.1%	648,263	4.2%
5001-10000	41	0.9%	299,363	2.0%
10001-50000	57	1.2%	1,161,838	7.6%
50001-	31	0.7%	12,297,115	80.4%
Total	4,665	100.0%	15,295,000	100.0%

By shareholder category

	Number of shares	% of shares
Companies total	654,488	4.3%
Foreign and nominee registered total	7,835,844	51.2%
Households	4,096,450	26.8%
Public sector and nonprofit institutions	1,666,899	10.9%
Banks and insurance companies total	1,041,319	6.8%
Total	15,295,000	100.0%
Major shareholders on Dec 31, 2012	Number of shares	% of shares
---	---	---
AC Invest Three B.V.	2,064,844	13.5%
Ilmarinen Mutual Pension Insurance Company	858,968	5.6%
Tapiola Mutual Pension Insurance Company	584,500	3.8%
Jari Sakari Koskinen	366,104	2.4%
Martti Ehrnrooth	325,070	2.1%
Vaasa Engineering Oy	299,514	2.0%
Mauri Holma	238,988	1.6%
Special Fund Handelsbanken Nordic Selective	187,000	1.2%
Fondica Nordic Micro Cap	167,100	1.1%
OP-Suomi Pienyhtiöt Investment Fund	165,422	1.1%
Own shares	83,227	0.5%
Other	9,954,263	65.1%
Total	15,295,000	100.0%
Number of shares outstanding	15,211,773

SHAREHOLDINGS OF THE BOARD OF DIRECTORS AND EXECUTIVE MANAGEMENT TEAM

Vacon Plc's Board members did not own company's shares on December 31, 2012. The President and CEO and other members of the Executive Management Team held a total of 105,144 shares, or 0.7% of the company's share stock and voting rights.

SHARE INFORMATION
FINANCIAL STATEMENTS

SHARE INFORMATION

Listing: NASDAQ OMX Helsinki
Listing start date: 14 December 2000
List: Mid Cap
Listing Sector: Industrials
ISIN code: FI0009009567
Trading code: VAC1V

EARNINGS PER SHARE

DIVIDEND PER SHARE

MARKET CAPITALIZATION

SHARE
[monthly average]

NASDAQ OMX HELSINKI

TRADING VOLUME
(thousand shares, monthly average)

VACON PLC | ANNUAL REPORT 2012

INVESTOR INFORMATION

ANNUAL GENERAL MEETING

Vacon Plc's Annual General Meeting will be held on Tuesday, March 26, 2013, at 3:00 p.m. in Vaasa, at Vaasan ylioppilastalo, Domus Bothnica, at Yliopistonranta 5, 65200 Vaasa. Shareholders wishing to attend the Annual General Meeting must be registered no later than March 14, 2013, in the company's shareholder register maintained by Euroclear Finland Oy, and shall notify the company of their attendance no later than 10:00 a.m. (GMT+2) on March 21, 2013.

Shareholders are requested to give their name, address, telephone number, and date of birth when informing the company of their attendance. If a shareholder wishes to attend the Annual General Meeting by proxy, he or she should provide this information when notifying the company of their attendance. Any letters of authorization should be sent to the above address by the date for notification.

The notification of attendance can be done at the company's website at www.vacon.com/agm2013, by telephone at +358 (0)40 8371 278 or by mail to Vacon Plc, Maija Suutarinen, Runsorintie 7, 65380 Vaasa, Finland.

SHARE REGISTER

The company's shares are entered in a book-entry securities system. A shareholder must notify the party maintaining his or her book entry account of address changes, changes in bank information provided for dividend payments, and other matters relevant to shareholding.

PAYMENT OF DIVIDENDS

The Board of Directors will propose to the Annual General Meeting that a dividend of EUR 1.10 per share be paid for the 2012 financial year. The dividend approved by the AGM will be paid to those shareholders who are registered on the reconciliation date in the company's share register maintained by Euroclear Finland Oy.

The AGM reconciliation date ... March 14, 2013
Dividend payment reconciliation date ... April 2, 2013
Dividend payment date ... April 9, 2013

FINANCIAL OVERVIEWS AND REPORTS IN 2013

Financial Statements Bulletin ... February 5, 2013
Annual Report 2012 ... week 10/2013
Interim Report January-March ... April 23, 2013
Interim Report January-June ... August 1, 2013
Interim Report January-September ... October 22, 2013

Vacon's Annual Report and Interim Reports are published in English and Finnish. The Annual Report is available in PDF format on the company's website and also as a hard copy. The hard copy is sent to shareholders upon request (please submit your order through the company's website or by sending e-mail to [email protected]).

All stock exchange releases and press releases are available on the company's website. You may also subscribe to Vacon's bulletins to your e-mail address by registering as a subscriber at www.vacon.com. You may also order the Annual Report by mail from:

Vacon Plc
Corporate Communications
Runsorintie 7
65380 Vaasa, Finland
Telephone: +358 (0)201 2121
Fax: +358 (0)201 212 208
E-mail: [email protected]
Internet: www.vacon.com

INVESTOR RELATIONS

The objective of Vacon's investor communications is to provide the financial markets with information about the company's strategies, operations, and business environment so as to form as accurate a picture as possible of Vacon as an object for investment. Vacon follows the principle of transparent, reliable, and up-to-date communications. The goal is to provide accurate and consistent information on a regular basis and objectively to all parties in the market.

RESPONSIBILITY FOR INVESTOR RELATIONS AT VACON:

Vesa Laisi, President and CEO
Tel. +358 (0)40 8371 510
[email protected]

Pia Aaltonen-Forsell, CFO (as of May 1, 2013)
Tel. +358 (0)40 8371 910
[email protected]

Sebastian Linko, Director, Corporate Communications and Investor Relations
Tel +358 (0)40 8371 634
[email protected]

Maija Suutarinen, Specialist, Corporate Communications and Investor Relations
Tel. +358 (0)40 8371 278
[email protected]

INVESTOR INFORMATION
FINANCIAL STATEMENTS

ANALYST COVERAGE

To Vacon's knowledge, at least the following brokers and financial analysts monitor Vacon's development. They have analyzed Vacon and drawn up reports and comments on their own initiative, and they are able to evaluate the company as an investment. Vacon assumes no responsibility for the opinions expressed in the analyses.

The analysts' names, companies and telephone numbers:

Timo Heinonen, Carnegie Investment Bank AB, tel. +358 (0)9 6187 1234
Panu Laitinmäki, Danske Bank, tel. +358 (0)10 236 4867
Artem Beletski, SEB Enskilda Equities, tel. +358 (0)9 6162 8729
Antti Kansanen, Evli Pankki Oyj, tel. +358 (0)9 4766 9149
Michael Schröder, FIM, tel. +358 (0)9 6134 6311
Tom Skogman, Handelsbanken Capital Markets, tel. +358 (0)10 444 2752
Pasi Väisänen, Nordea Bank Ab, tel. +358 (0)9 165 59 943
Pekka Spolander, Pohjola Bank plc, tel. +358 (0)10 252 4351

VACON PLC | ANNUAL REPORT 2012

NOTES

Vacon Plc
Headquarters, Vaasa, Finland
Sales offices
Australia, Austria, Belgium, Brazil, Canada, China, Czech Republic, Denmark, France, Germany, India, Italy, Kazakhstan, Mexico, Netherlands, Norway, Romania, Russia, Singapore, Slovakia, South Korea, Spain, Sweden, Thailand, Ukraine, United Arab Emirates, United Kingdom, USA
Production plants
China, Finland, India, Italy, USA

VACON PLC | ANNUAL REPORT 2012
115

AI assistant

NACON — Annual Report 2012

1539_rns_2013-03-05_9f5eeb35-260e-4c30-a55f-abc19636006f.pdf

2012

ANNUAL REPORT

50 TWh

20 TWh

CONTENTS

CORPORATE OVERVIEW

BUSINESS OVERVIEW

GOVERNANCE AND MANAGEMENT

CORPORATE RESPONSIBILITY

FINANCIAL STATEMENTS

CONSOLIDATED FINANCIAL STATEMENTS

PARENT COMPANY’S FINANCIAL STATEMENTS

INVESTOR INFORMATION

VACON—A FULL-SERVICE AC DRIVE COMPANY

CUSTOMERS AND INDUSTRIES

SHAREHOLDERS

TOGETHER TOWARDS

EVEN MORE EXCELLENT RESULTS

GROWTH TREND CONTINUES IN THE MARKETS

DRIVERS OF MARKET GROWTH

VACON'S OBJECTIVES AND STRATEGY

PRODUCT LEADERSHIP

100% FOCUS ON AC DRIVES

MULTI-CHANNEL SALES

GLOBAL PRESENCE

STRATEGIC KNOW-HOW

ONE OF THE LARGEST PRODUCT PORTFOLIOS IN THE MARKET

BUSINESS OVERVIEW BY CUSTOMER BUSINESS SECTOR

IMPROVED EFFICIENCY WITH AC DRIVES

THE SHARD IN THE UK

A SEMICONDUCTOR FACTORY IN CHINA

20%

ENERGY-EFFICIENCY AND RELIABILITY ACROSS THE SEAS OF THE WORLD

A SMOOTH RIDE WITH VACON AC DRIVES

STRONG GROWTH IN CHINA

PRECISE AND ENERGY-EFFICIENT HOISTING

LATEST PIPE-LAYING TECHNOLOGY AT SEA IN CHINA

SMOOTH WATER TREATMENT WITH VACON AC DRIVES

ANNUAL EUR 5,000 SAVINGS AT SWIMMING POOLS IN THE UK

ONE OF THE WORLD'S LARGEST DISTRICT COOLING PLANTS IN STOCKHOLM, SWEDEN

HIGH-QUALITY FOOD PRODUCTION WITH VACON AC DRIVES

MORE REFRIGERATION POWER WITH AC DRIVES

SUSTAINABLE DEVELOPMENT IN HARVESTING NATURAL RESOURCES

A GOLD MINE IN BRAZIL

DID YOU KNOW that a bulk of the metal used by industry in China comes from mines in Australia, which are often located at long end challenging distances.

SPEED AND POWER CONTROL IN ALL PROCESS AREAS

'95

QUICK DELIVERY OF REPLACEMENTS

VACON'S STRONG POSITION IN SOLAR ENERGY PRODUCTION

COMPETENCE CENTER FOR SOLAR ENERGY PRODUCTS IN SPAIN

SOLAR POWER PLANT ON THE ROOF OF A YARN FACTORY IN SPAIN

CONVERTING WIND INTO ELECTRICITY USING VACON'S TECHNOLOGY

GOVERNANCE AND MANAGEMENT

CORPORATE GOVERNANCE STATEMENT 2012

COMPLIANCE WITH THE CORPORATE GOVERNANCE CODE OF FINNISH LISTED COMPANIES

INTERNAL MONITORING AND RISK MANAGEMENT SYSTEMS RELATED TO FINANCIAL REPORTING

Monitoring systems

Internal monitoring

Internal audit

Risk management

Insider administration

Audit

GENERAL MEETING

COMPOSITION AND OPERATIONS OF THE BOARD OF DIRECTORS AND ITS COMMITTEES

Composition and term of office of the Board of Directors

Duties of the Board of Directors

Evaluation of independence

Decision-making

Meeting practice and self-assessment

Fees and other benefits of the members of the Board of Directors

COMMITTEES

Remuneration and Nomination Committee

Audit Committee

CEO AND OTHER MANAGEMENT

CEO

Executive Management Team

FEES AND OTHER BENEFITS OF THE CEO AND OTHER MANAGEMENT

NACON Annual Report 2012